MARKET WATCH
Gasoline supply worries raise energy prices

Sam Fletcher
Senior Writer

HOUSTON, May 18 -- Energy prices escalated May 17 as unexpected shut-ins of US refining capacity "sent shock waves through the markets," analysts said.

The front-month contract for benchmark US crudes topped $65/bbl in intraday training in the New York market because of "a continuous string of refinery snags, with Murphy Oil, ConocoPhillips, and BP PLC being the latest to shutdown units due to lagging maintenance issues," said analysts in the Houston office of Raymond James & Associates Inc. "Above-average weekly gasoline inventory draws this year have left traders skittish regarding gasoline supplies, now 7% below the 5-year average, as we quickly approach this summer's driving season."

Rising crude prices also pulled natural gas futures above $8/MMbtu in New York. "Even with the recent near-term volatility, oil prices have remained above $60/bbl for almost 2 months. We continue to believe that rising global demand, coupled with minimal excess production capacity from the Organization of Petroleum Exporting Countries and increasing visibility of geopolitical risks, are likely to drive oil prices even higher as 2007 progresses," Raymond James analysts reported. "Furthermore, the [North Sea] Brent crude oil contract—still viewed by many as the more-accurate benchmark [than the US crudes]—rallied above $70/bbl and now represents a $5/bbl premium to [top US crudes]."

Raymond James analysts said: "LNG imports to the US continue to come in at elevated levels as a result of the remaining supply overhangs in Asia and Europe. However, we believe that increased gas demand fueled by a rising price incentive to burn natural gas over crude derivatives, combined with increased liquid stripping and declining imports from Canada should help offset the increase in LNG imports during this injection season. Of note, the natural gas 12-month strip has reached $9/Mcf for the first time in over 8 months; and as such, gas producers can now hedge winter 2007-08 volumes at an appetizing price of over $10/Mcf."

Analysts at Enerfax Daily said Canadian gas supplies to the US in June may be 600 MMcfd below last year's levels. "Companies cut their drilling budgets last year as prices dipped and well costs soared," they said.

Energy prices
The June contract for benchmark US light, sweet crudes traded as high as $65.09/bbl before closing at $64.86/bbl, up by $2.31 for the day on the New York Mercantile Exchange. The July contract gained $1.97 to $65.92/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.31 to $64.87/bbl. Heating oil for June delivery escalated by 6.97¢ to $1.94/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) jumped by 9.96¢ to $2.44/gal.

The June natural gas contract traded as high as $8.14/MMbtu in the NYMEX session before closing at $8.08/MMbtu, up 18.5¢ for the day. On the US spot market, gas at Henry Hub, La., gained 10¢ to $7.71/MMbtu.

After the US Energy Information Association reported an injection into US gas storage that was at the low end of expectations among Wall Street analysts, gas futures prices rose "on fund buying," said analysts at Enerfax Daily. "Speculative traders have been trying to push the market above $8[/MMbtu] but have found higher prices difficult to sustain amid mild weather. The increase in storage should ultimately place incremental downward pressure on futures. The funds want to escape from the trading range so technicals would kick in to help force prices higher. Hedge funds, who had been betting that the price of June natural gas futures would fall, have been buying back long positions ahead of warmer weather."

In London, the new front-month July IPE contract for North Sea Brent crude jumped by $2.30 to $70.27/bbl. Gas oil for June increased by $10.50 to $599/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by 72¢ to $65.14/bbl on May 16.

Contact Sam Fletcher at samf@ogjonline.com.

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