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Saudi 'shock and awe' slams oil; nat gas gets burned

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OPEC talked down the oil market, sending crude sharply lower, while warm weather and growing supply battered natural gas prices.

West Texas Intermediate futures for February fell more than 3 percent, or $1.87, to $55.26 per barrel, as traders reacted to comments from Saudi Arabian Oil Minister Ali al-Naimi. Natural gas fell more than 9 percent to $3.144 a million British thermal units in the biggest one-day drop since February.

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Naimi and other officials attending an energy conference in Abu Dhabi reaffirmed OPEC's decision to hold output at current levels. He said the steep drop in oil prices was due to the lack of coordination among other non-OPEC producers as well as speculators and misleading information.

Naimi said it was not in the interest of OPEC to cut production, no matter what the price is. "Whether it goes down to $20, $40, $50, $60, it is irrelevant," he was quoted as saying.

What's driving nat gas lower?
What's driving nat gas lower?

"The statements out of al-Naimi over the weekend were remarkable. Even if non-OPEC producers cut, they're not going to cut," said John Kilduff of Again Capital. "It really is Saudi 'shock and awe.'"

Oil has fallen sharply since the Organization of the Petroleum Exporting Countries announced on Nov. 27 that it would not cut production, in a bid to keep market share. WTI hit a low of $53.60 per barrel last week and Brent was under $60 but they tried to stabilize at the end of the week.

"I think we're going to take a run at $50," for WTI, said Andrew Lipow, president of Lipow Oil Associates. "Not only have they reiterated that they're not going to cut production, we've seen the Iraqis announcing they're going to increase production in 2015. It seems like a game of chicken to see who is going to cut first, and the answer is no one. No one is cutting their existing production."

Lipow said in the U.S., new wells are not being started but producing wells are not being shut down.

As for natural gas, a warmer-than expected weather outlook and increasing supplies combined to pummel futures prices, now down 28 percent in a month.

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"We could easily see $3 a million BTUs. It's not that far away, but it's psychologically a big number," said Lipow. "Then people would probably start talking about $2.75 or $2.50. I think we're a long way from that given the winter is still a long way ahead of us."

Natural gas had been in a relative deficit to last year's level and the industry has been producing at record levels to make up for it. Supplies rose above last year's level for the first time last week, another negative for nat gas, driving it deeper into bear territory.

"The weather is just not cooperating. It's just been persistent," said Kilduff. "There was supposed to be a series of arctic blasts in November that didn't materialize. If you look at any extended forecasts, there are 50 degree days sprinkled throughout. The industry battled against a fairly substantial deficit all year long. Things changed seismically for demand. The production is at record levels—up 8 percent year over year.":

The stock market has been looking for a bottom in energy stocks. Cuts in capex spending by oil producers have led to speculation that the bottom is near for energy shares, but the S&P energy sector was down nearly 1 percent Monday, after gaining 9 percent last week.

Meanwhile, Standard & Poor's Monday put BP, Royal Dutch Shell and Total on negative watch but reaffirmed credit ratings.

For consumers, the drop in energy prices has been a dividend. Gasoline lost 15 cents per gallon last week, and the national average was $2.39 Monday, a more than five-year low. According to AAA, the 88 days of declining gasoline prices are now a record, and prices are seen dropping further.