Oil, Natural Gas Prices Poised to Rally

Germany's forecast of a prolonged eurozone debt crisis threw cold water over oil prices Monday, but analysts say the bulls are still in control.

The December Brent crude contract was falling $1.07 to $111.16 a barrel and West Texas Intermediate (WTI) light sweet crude oil for November delivery was behind by 70 cents to $86.10 as the dollar strengthened against the euro on the reaction to warnings by the heads of Europe's biggest economy -- Germany -- that the eurozone debt crisis may prolong into next year. This, despite the concerted efforts of leaders from the Group of 20 leading economies and the European Union to save the region.

The U.S. dollar was gaining 0.7% against the euro Monday morning.

In its latest weekly reporting period, the U.S. Commodity Futures Trading Commission reported non-commercial players reduced their net long position in NYMEX crude oil futures and options by 16,586 contracts to 197,586 contracts, while speculators' net short positions in natural gas futures and options rose by 3,193 contracts to 165,150 contracts.

"The bottom line," says PFGBest senior energy analyst Phil Flynn, "is that oil is living and dying with the twists and turns in this European nightmare."

Although WTI prices are down in the intraday, optionsXpress analyst Mike Zarembski notes that they are overall still holding "solidly" above their 20-day moving average, "keeping short-term crude bulls firmly in charge."

"However, before the market can turn solidly into the bull camp, there are several technical barriers which must be overcome," he said, noting chart resistance between $90 and $91 for the December contract.

BGC Financial director Roger Volz says that WTI will have to settle at $88 for the next two days for it to continue trending higher.

WeatherBELL Analytics' energy analyst Alan Lammey sees a potential boost in store for oil prices in general, with the injection of a risk premium into pr! ices if there was a realization of worries that Iran may attempt to cause unrest in Saudi Arabia during the annual hajj pilgrimage to Mecca next month. Both regions are the top global oil exporters.

"It looks like there's some major tensions rising there -- so that's a very important event to watch," says Lammey. Hajj is expected to fall between Nov. 4 and Nov. 9.

In spite of concerns about a global economic decline and long-term decline in energy consumption, the oil and gas industry has been positioning itself for growth with a series of deals and increased drilling activity.

This week kicked off with a number of deals, including Kinder Morgan's(KMI) agreement to buy El Paso(EP) for $21.1 billion in a cash-and-stock deal, which creates the largest network of natural gas pipelines in the U.S., and is the largest energy merger this year; and Statoil's(STO) agreement to buy Brigham Exploration(BEXP) for $36.50 a share in cash.

Bernstein analysts say the Statoil-Brigham Exploration deal "is certainly an acquisition for growth, rather than for production today," and highlights risks such as Statoil losing technical staff from Brigham with the completion of the deal, and the pricing of the liquids production based on the discounted WTI, rather than Brent benchmark pricing.

Separately, Anadarko Petroleum(APC) agreed to pay BP(BP) $4 billion to settle all claims from the Gulf of Mexico oil spill in April 2010, which Canaccord Genuity energy analysts say fully removes the overhang associated with the Macondo incident, and should redirect investor focus towards Anadarko's "superior" deepwater exploration portfolio, strong liquidity, and improving U.S. onshore productivity. The company has confirmed that it is indeed now marketing its Brazilian assets, with a sale likely to g! arner at least $5 billion, or $10 a share, according to Canaccord Genuity analysts

Last Friday, Baker Hughes reported the oil rig count increased by ten rigs to 1,080. "Despite all the consternation about a potential decline in oil directed activity, we certainly aren't seeing it in the rig count," say Canaccord Genuity analysts.

The oil rig count has risen by almost 200 rigs since Brent and WTI spiked about six months ago.

"In our view, the '08 experience suggests the oil price will need to decline significantly to reduce activity," the analysts emphasize. "In '08, WTI peaked above $145 in early July, but the rig count still rose almost 70 rigs over the next four months before peaking at 442. By that time, WTI had fallen all the way to $61 -- less than half its prior level."

Natural gas futures for November delivery were down a bit more than a penny to $3.689 per million British thermal units as investors took profits following the contract's largest intraday gain in more than four months last week.

This, "as the first major cold front of the 2011 to 2012 winter season begins to move across the U.S. and even into parts of the South, including Texas," says Lammey. "It's expected that a little bit of profit taking would emerge," he added. "From a technical perspective, the November contract has become a bit overbought."

The analyst says that $3.45, as a major support area, has already held twice by natural gas. Thus, if the sellers attempt to retest that area -- a likely scenario -- and prices still fail to break below that level, it can be assumed that natural gas prices have already hit bottom -- and go nowhere but higher from there.

"Winter is most definitely coming -- and according to WeatherBell meterologist Joe Bastardi it's very likely to have a very cold beginning between mid and late November, all the way through Christmas, which is supportive from the fundamental perspective," he said.

EO! G Resour ces(EOG) was tumbling 2.1% to $82.26; Triangle Petroleum(TPLM) was gaining 4.8% to $4.33; Chesapeake Energy(CHK) was flat at $27.75; Southern Union(SUG) was up 0.4% to $40.94;Chevron(CVX) was falling 1.2% to $99.27; Apache(APA) was behind by 1.6% to $89.92; and Anadarko was adding 5% to $74.