MARKET WATCH: Crude rebounds more than $2/bbl

Sam Fletcher
Senior Writer

HOUSTON, Apr. 7 -- The May crude contracted rebounded by more than $2/bbl Apr. 4 in the New York market as traders shrugged off a report that US employment fell in March for the third consecutive month, with 80,000 jobs eliminated, the most in 5 years.

The US Department of Labor reported the nation's unemployment rate increased to 5.1% from 4.8%—the highest level since September 2005 when employment fell after Hurricanes Katrina and Rita slammed into the central Gulf of Mexico less than 30 days apart.

Analysts in the Houston office of Raymond James & Associates Inc. said Apr. 7, "Crude continues to rally this morning after the Organization of Petroleum Exporting Countries' secretary-general noted that supplies remain plentiful, although a production cut is likely improbable."

They also observed, "Clearly, the outlook for summer gas prices has improved substantially with the lower gas storage levels. In fact, higher prices are likely to remain into June. We are raising our 2008 natural gas price forecast from $6.50/Mcf to $8/Mcf. Despite our higher forecast, it is important to note that we think there is still some risk to late summer natural gas prices, although weather could push things either way."

Raymond James analysts said, "On the oil side, our outlook has consistently been more bullish than [Wall] Street's, and we have consistently underestimated oil prices. Longer term (next 1-5 years), these high oil prices are justified by very solid supply and demand fundamentals. Short term, the huge upswing in the overall commodities market is supporting high oil prices. The combination of these issues is driving us to raise our 2008 oil forecast from $90 to $100/bbl and raise our 2009 oil price forecast from $100 to $110/bbl."

Tristone Capital Inc., Calgary, also raised its oil price estimate to $100/bbl for 2008-09. Tristone analysts expect generally reduced economic growth forecasts will continue to diminish the demand for fuel among members of the Organization for Economic Cooperation and Development, setting the stage for rebuilding global inventories in the second and third quarters of 2008. Yet they also expect continued demand growth in China and the Middle East to offset the slowdown among OECD countries.

Meanwhile, investment funds are attracted to the crude market as a hedge against inflation and the weak US dollar. "With still rising upstream costs and the inevitable layering of environmental controls, we see $80-90/bbl West Texas Intermediate prices necessary to support the growth in non-OPEC supply," said Tristone analysts.

Moreover, they foresee "a series of wild cards" challenging the industry's ability to replenish natural gas storage prior to next winter. They expect LNG imports into the US to trail 2007 figures, while low water levels and limited nuclear power generation will boost gas-fired power generation this summer. As a result, Tristone raised its 2009 and 2009 gas price forecasts to $9/MMbtu and $9.50/MMbtu, respectively.

In an Apr. 3 report, KBC Process Technology Ltd., Surrey, UK, said: "During April, crude prices are still likely to respond more to financial market indicators than to oil market fundamentals, with the main focus on the US dollar and interest rates. Oil prices continue to show a marked inverse correlation to the value of the US dollar. The chances are that the dollar will continue to slip under further pressure from anticipated Federal Reserve action to trim interest rates to help shore up US economic activity. Thus, with support from tightening gasoline stocks, oil price risk for April appears weighted to the upside. Thereafter, upward price pressures are expected to attenuate as dollar exchange rates stabilize, possibly as a result of intervention, and focus shifts to the oil demand consequences of weakness in the US economy. Upward oil price risk will start to moderate as investors focus on rising oil stocks."

Energy prices
The May contract for benchmark US light, sweet crudes jumped by $2.40 to $106.23/bbl Apr. 4 on the New York Mercantile Exchange. The June contract was up $2.50 to $105.76/bbl. The May contract for reformulated blend stock for oxygenate blending (RBOB) gained 3.24¢ to $2.76/gal on NYMEX. Heating oil for the same month escalated 6.93¢ to $2.99/bbl.

The May natural gas contract lost 9.5¢ to $9.32/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 31.5¢ to $9.38/MMbtu.

In London, the May IPE contract for North Sea Brent crude lost $1.23 to $102.52/bbl. The April gas oil contract, however, jumped $33 to $956.75/tonne.

The average price for OPEC's basket of 13 reference crudes was unchanged at $98.63/bbl on Apr. 4. So far this year, OPEC's basket price has averaged $92.80/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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