Crude tops $62/bbl

Sam Fletcher
OGJ Senior Writer

On May 20, its first day in the front month position, the July contract for benchmark US sweet, light crudes escalated $1.94 to $62.04/bbl on the New York Mercantile Exchange, marking the first closing above $60/bbl since early November.

Crude futures were spurred past $60/bbl resistance by gains in the equity market, a weak US dollar, and the latest wave of unrest in the Niger Delta, with raids on both oil facilities and militants' camps reported. However, July crude retreated to $61.05/bbl in the next session as major US equity stock indexes were hammered and the dollar gained in value.

Nevertheless, with the Dow Jones Industrial Average down more than 2% and a sharp drop in the price of natural gas, the fact that crude was able to sustain above $60/bbl was "further confirmation that crude oil is starting to have a trading life of its own rather than being a pure correlation to equities that even a 5-year-old could trade," said Olivier Jakob at Petromatrix, Zug, Switzerland.

In New Orleans, analysts at Pritchard Capital Partners LLC said, "On a historic basis at 17 times the price of natural gas, oil is trading way above the historical 7:10 ratio. However, concerns over the dollar and its sovereign credit rating may help crude hold the $60 level provided investors see crude as an alternative to the dollar."

At the Centre for Global Energy Studies (CGES), London, analysts said, "The oil futures market remains buoyant, despite ample oil inventories in the US and Europe and over 130 million bbl of oil stored at sea, while US refinery utilization remains low."

They said, "The current economic situation remains unremittingly bleak—US housing starts in April were at their lowest level since records began, and Japan has posted ghastly first quarter gross domestic product figures." Nonetheless, CGES analysts said, "Global oil demand could be at a turning point, and oil prices will find more support from the fundamentals if there is a stock draw during this quarter, as the Centre expects."

Demand is not nearly as feeble as it was in the first quarter, said CGES analysts. "During this quarter consumer inventories were run down in most industries, causing stocks to rise at the manufacturing or extraction stage, but such a process cannot carry on indefinitely. In the oil market, the secondary and tertiary stocks have been run down so far, and when these come close to tank bottoms a draw down of primary stocks should begin. Indeed, this looks to have already begun in the US," they said.

Meanwhile, the main challenge for the Organization of Petroleum Exporting countries is to maintain a high level of compliance with the group's official target. "With Nigeria in disarray, other members might well be tempted to make up this 'shortfall,'" warned CGES analysts.

Natural gas
During May 21 trading, analysts in the Houston office of Raymond James & Associates Inc. said, "The real fireworks were in the gas market where prices plummeted 9%"—the biggest one-day drop in natural gas futures prices since August 2007. That came after the Energy Information Administration reported the injection of 103 bcf of natural gas into US underground storage in the week ended May 15. It put working gas in storage at 2.1 tcf, up 514 bcf from year-ago levels and 387 bcf above the 5-year average (OGJ Online, May 21, 2009).

Raymond James analysts said, "The market is still over-supplied, and the drastic fall in the rig count was most likely too late to save the market from dismal summer gas prices. Be it delayed completions, choking back wells, or completely unplugging the Christmas tree, we still believe there will have to be substantial shut-ins this summer."

The drop in gas price appeared "completely trading driven as the price action on the physical hubs was fairly subdued, and approximately half of the hubs we monitor traded up on [May 21] despite the pounding NYMEX natural gas took. The physical markets are not moving in lock step with the NYMEX 'trading' market," said Pritchard Capital Partners. "If the physical markets do not follow the NYMEX market in next few days, the sell-off may just have been a trading event."

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "At prices near $4/MMbtu, the EIA calculates a 2 bcfd gain in gas use in the southeast US. In our view, a gain of this amount is required over the rest of the storage build season in order to prevent a storage peak rising from 3.7 tcf to 4.1 tcf."

(Online May 25, 2009; author's e-mail: samf@ogjonline.com)

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