MARKET WATCH: Energy prices rebound amid talk of production cuts

Sam Fletcher
Senior Writer

HOUSTON, May 14 -- Energy prices rebounded May 13 amid speculation that Iran might cut its crude production by 400,000-1 million b/d beginning in June.

Iranian Oil Minister Gholam-Hossein Nozari, however, denied such a move. Hossein Kazempour Ardebili, Iran's departing governor to the Organization of Petroleum Exporting Countries, told Dow Jones Newswires his country is storing 25 million bbl of heavy crude in 10-12 tankers in the Persian Gulf because it could find no buyers for that supply.

Olivier Jakob at Petromatrix, Zug, Switzerland, noted, "Iran has not reduced production even in times of OPEC quota reduction and with the [United Nations] sanctions [stemming from the dispute over Iran's nuclear program] it would make little sense for them to lose the little market share they have been able to preserve." Jakob said, "It is true, however, that they have about 25-30 million bbl of unsold oil sitting afloat on tankers, and talking the market up is good salesmanship to push the potential buyers to finally come to the table."

Analysts in the Houston office of Raymond James & Associates Inc. said the price of crude futures "eased slightly" in early trading May 14, following reports that Iran would not reduce its oil exports. However, they said, "Natural gas is trading approximately 2.5% higher this morning on news that repair service on Independence Hub (1 bcfd) has been extended until the first half of June."

Enterprise Products Partners LP said repairs of its Independence Trail pipeline are expected to be completed in the first half of June, pushing back the restart of Independence Hub from the previous mid-May target date. Analysts at Pritchard Capital Partners LLC, New Orleans, said. "On the macro level, this is further bullish news for domestic gas prices and could add even more near-term price support."

Meanwhile, although there has yet been no obvious impact on world markets, there is speculation that China's demand for oil may be curtailed temporarily as a result of recent massive earthquakes in that country.

The US dollar rallied against other major currencies after the US government reported better-than-expected retail sales for April. In other action, the House passed legislation to suspend crude deliveries to the US Strategic Petroleum Reserve while prices remain above $75/bbl. The Senate had already approved a similar measure. Jakob predicted, "The White House will not veto the bill. The SPR refill was accounting for 7% of the 2008 oil demand growth and while stopping it will not by itself bring the price down $40/bbl, it will nonetheless help the supply and demand balances."

US inventories
The Energy Information Administration said May 14 commercial US crude inventories inched up only 200,000 bbl to 325.8 million bbl, well below Wall Street's projections of a 1.9 million bbl increase, during the week ended May 9. Gasoline stocks fell 1.7 million bbl to 210.2 million bbl in the same period, surpassing the 100,000 bbl decrease expected by Wall Street analysts. Distillate fuel inventories gained 1.4 million bbl to 107.1 million bbl vs. a consensus of an 800,000 bbl build. Propane and propylene inventories increased by 1.5 million bbl to 31.3 million bbl in the same week.

Imports of crude into the US fell by 695,000 b/d to 9.9 million b/d in that period. Input of crude into US refineries increased by 405,000 b/d to 15.1 million b/d, however, as refining capacity increased to 86.6%. Gasoline production increased to 8.9 million b/d. Distillate fuel production increased to 4.4 million b/d.

Energy prices
The June contract for benchmark US light, sweet crudes traded in a range from $123.10/bbl to a record intraday high of $126.98/bbl May 13 on the New York Mercantile Exchange before closing at $125.80/bbl, up $1.57 for the day. The July contract gained $1.49 to $125.59/bbl.

On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.56 to $125.80/bbl. The June contract for reformulated blend stock for oxygenate blending (RBOB) touched an intraday high of $3.2275/gal prior to closing at $3.20/gal, up 3.58¢ for the day on NYMEX. Heating oil for the same month also hit an all-time high, $3.7146/gal, in that session prior to a record closing of $3.70/gal, up 13.91¢. "Front-month heating oil futures have surged 42.5¢/gal, or 12.9%, over the past 4 weeks, putting cracks just north of $30/bbl," said Pritchard Capital Partners.

The June natural gas contract escalated 12.1¢ to $11.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 18.5¢ to $11.19/MMbtu. Pritchard Capital Partners analysts said, "Despite the [gas futures] gain, some market watchers say time might be running out on the recent trend higher. Some market experts see the market under continued stress as the risks of filling storage in a timely fashion are increased by potential weather-driven power generation demand and production outages caused by tropical storm interruptions."

Meanwhile, AccuWeather meteorologist Joe Bastardi expanded his 2008 hurricane forecast. "The Gulf of Mexico will have a normal distribution of tropical cyclone activity, with energy interests experiencing at least 7-10 days with disruptions or threats of disruptions," he said. "Specifically, the forecast is for 2-3 storms that affect the energy infrastructure in and around the gulf and bring at least tropical storm force winds to the Gulf Coast, including one or two that bring hurricane force winds."

In London, the June IPE contract for North Sea Brent crude increased $1.19 to $124.10/bbl. The new front-month June contract for gas oil jumped by $26 to a record $1,203.50/tonne.

The average price for OPEC's basket of 13 reference crudes lost 89¢ to $118.76/bbl on May13.

Contact Sam Fletcher at samf@ogjonline.com.

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