Energy prices rallied in early May with natural gas climbing above $4/MMbtu and crude at one point topping $58/bbla new high for the year—as traders shrugged off bearish inventory reports and focused instead on indications of a possible economic turnaround.
In Houston on May 8, analysts at Raymond James & Associates Inc. said, "Money has been flowing heavy into commodities this week, and it has helped prop up oil prices as big funds are betting that the worst of the recession is over." They noted natural gas prices had rallied more than 30% in less than 2 weeks "despite a string of bearish data points." But they said it looked more like a "short squeeze" rather than a real market bottom.
At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "Oil fundamentals do not support such a move [to $56-58/bbl] with the year-on-year excess in US oil inventories together with oil in floating storage amounting to 225 million bbl."
In the week ended May 1, US refiners ran more crude and feedstock than in any week since Dec. 5, 2008. "However, total petroleum demand on a 4-week basis was still the lowest since May 1999," said analysts at Pritchard Capital Partners LLC, New Orleans.
Meanwhile, Automatic Data Processing Inc. reported US nonfarm private employment decreased by 491,000 in April on a seasonally adjusted basis, compared with a revised drop of 708,000 in March.
The US Department of Labor reported 601,000 new applications for jobless benefits in the week ended May 1, the smallest increase in 14 weeks and a possible indication that layoffs have peaked. Nonetheless, the total number of people receiving unemployment benefits climbed to 6.35 million. In a separate report, the government said US productivity grew at an annual rate of 0.8%better than economists expectedin this year's first quarter.
Pritchard Capital Partners said, "Recent economic data releases continue to show an increase in economic activity and at some point we should see an increase in demand for both crude and gasoline."
However, Raymond James analysts said, "We continue to think the fundamentals look pretty poor in the domestic market and that many of the stocks could be getting ahead of themselves."
Olivier Jakob at Petromatrix, Zug, Switzerland, said, "On the fundamental side, a crude oil price of $50-60/bbl should make about zero difference on the demand side of the equation. Retailers have not been passing the entirety of the price drop to the consumer, and Western governments have not been pushing them to do so in order to preserve some of the energy efficiency gains. Hence there is some room for a price increase in futures before the consumer gets hit on the retail side."
Jakob said, "On the supply side a price of $60/bbl rather than $50/bbl could provide some lower compliance [among members of the Organization of Petroleum Exporting Countries], but the main cheaters are already leaking at $50/bbl so the net difference will be hard to immediately measure." He said, "In the end, what will make the sustainability of $60/bbl or of $50/bbl will be the size and the sustainability of the crude oil contango."
Natural gas rebound?
Meanwhile, Pritchard Capital Partners said conference calls by exploration and production companies indicated industry executives expect natural gas will rebound late this year or early in 2010. They reported, "Mark Papa, CEO of EOG Resources Inc., said he sees US natural gas production down 4.5 bcfd [of gas equivalent] by the end of 2009." That, the analysts noted, is in contrast to PIRA [Petroleum Industry Research Associates] Energy Group's estimated decline of 3 bcfed. "If Papa's comments are correct, the bottom for natural gas may be near," said analysts.
They said Bob R. Simpson, founder and chief executive of XTO Energy Inc. in Fort Worth, indicated he expects the price of natural gas to double by next May.
In other news, Raymond James analysts reported China approved a plan to set up 10 million tons of refined fuel state reserves by 2011 as part of its economic stimulus plan. At China's current consumption, it would provide 2 weeks of gasoline, diesel, and kerosine combined.
Jakob said, "Early indications are that China in April printed another record in car sales (according to our tracking that would amount to about 25% growth in April sales for all automobiles and 37% for passenger cars) and continues the recent trend of selling more cars than the US."
(Online May 11, 2009; author's e-mail: email@example.com)