MARKET WATCH: Economy indicators push up energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 7 -- Energy prices jumped May 6 in the New York market, driven by a better-than-expected report on US unemployment, a smaller-than-expected oil inventory increase, and technical buying as the front-month crude contract hit a record-high for the year above $56/bbl.

The Energy Information Administration reported commercial US inventories of crude increased 600,000 bbl to an above-average 375.3 million bbl in the week ended May 1—far short of Wall Street's consensus of a 2.5 million bbl gain. Gasoline stocks decreased 200,000 bbl to 212.4 million bbl in the same period. Distillate fuel inventories climbed by 2.4 million bbl to 146.5 million bbl, also above average (OGJ Online, May 6, 2009).

US refiners ran more crude and feedstock last week than in any week since the Dec. 5, 2008. "However, the total petroleum demand on a 4-week basis is still the lowest it has been since May 1999," said analysts at Pritchard Capital Partners LLC, New Orleans. "Distillate demand implies continued weakness for distillates; overall the inventory report is positive for crude, but refined products should not benefit from it.

Meanwhile, Automatic Data Processing Inc. reported US nonfarm private employment decreased 491,000 in April on a seasonally adjusted basis, compared with a revised drop of 708,000 in March.

On May 7, the US Department of Labor reported 601,000 new applications for jobless benefits last week—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.

The government said in separate report US productivity grew at a rate of 0.8%/year—better than economists expected—in this year's first quarter.

In Houston, analysts at of Raymond James & Associates Inc. reported commodities and equities were higher in early trading May 7, "which is likely to extend the rally." However, they said, "Some headwinds could come in the form of mixed earnings results, which we expect. All eyes will be on the multitude of earnings releases and conference calls on a day when it seems like every energy company is reporting. In general, 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."

Energy prices
The June contract for benchmark US light, sweet crudes jumped by $2.50 to $56.34/bbl May 7 on the New York Mercantile Exchange. The increase and price were the same for West Texas Intermediate at Cushing, Okla., on the US spot market. The July crude contract gained $2.15 to $57.59/bbl on NYMEX. Heating oil for June delivery increased 4.51¢ to $1.47/gal. Reformulated blend stock for oxygenate blending (RBOB) for the same month was up 5.58¢ to $1.63/gal.

Natural gas for June escalated by 27.2¢ to $3.89/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 8.5¢ to $3.70/MMbtu. Pritchard Capital Partners said, "Natural gas rallied sharply on comments made by industry executives indicating that they believe the reduction in US rig count may end the decline in the price of natural gas." In a conference call with analysts, they said, Bob R. Simpson, founder and chief executive officer of XTO Energy Inc. in Fort Worth, indicated he expects the price of natural gas to double by next May.

Meanwhile, EIA reported the injection of 95 bcf of natural gas into US underground storage in the week ended May 1. As a result, working gas in storage exceeded 1.9 tcf; that's 491 bcf higher than in the same period last year and 362 bcf above the 5-year average.

In London, the June IPE contract for North Sea Brent crude increased $2.03 to $56.15/bbl. Gas oil for May gained $12.50 to $462/tonne.

The average price for OPEC's basket of 12 reference crudes advanced by $1.38 to $54.09/bbl on May 6.

Contact Sam Fletcher at samf@ogjonline.com.

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