MARKET WATCH: Energy prices rally; crude tests $60/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 20 -- Oil prices continued to rise May 19 with crude futures testing 6-month highs in the $60/bbl range in the volatile New York market.

In Houston, analysts at Raymond James & Associates Inc. said crude prices surpassed $60/bbl in intraday trade because of renewed conflict in Nigeria and refinery accidents in the US. With crude prices "somewhat rebounding," they said, the Organization of Petroleum Exporting Countries is likely to maintain production quotas when it meets May 28. "But the wording of its decision will be closely watched," they said.

Nigerian security forces reported a shootout with militants near a Chevron Corp. oil flow station in the western Niger Delta. Last week Nigeria's military launched its biggest offensive in some years with a helicopter and gunboat attack on a major militant camp. The Movement for the Emancipation of the Niger Delta (MEND) claimed it blew up two pipelines over the weekend, but that has not yet been confirmed. The group also threatened to blockade regional waterways to prevent crude oil exports.

Natural gas fell more than 6% May 19 on the New York market. "If our forecasts are right, prices could trend even lower heading into summer," said Raymond James analysts.

In New Orleans, analysts at Pritchard Capital Partners LLC attributed the weakness in natural gas prices to technical trading after the front-month contract recently dropped below $4/Mcf. "Some traders cited the break as evidence that natural gas may retest the 6½-year low of $3.155/Mcf seen in late April. Technicians see the first support for natural gas at $3.50-3.60/Mcf, which would represent a retracement of approximately half of last month's $1.20 rally in natural gas. There is also concern that the current forecast for mild spring weather may delay seasonal air conditioning demand and exacerbate the current oversupplied natural gas inventory level," said Pritchard Capital Partners.

In other news, IHS Cambridge Energy Research Associates Chairman Daniel Yergin told the Joint Economic Committee the global collapse of oil prices threatens future oil supplies and increases the prospect for a "long aftershock" in energy fundamentals of supply and demand when the economic crisis passes. He said a recent study shows most of the expected growth in oil production capacity over the next 5 years is in danger of deferment or cancellation in the current economic environment.

US inventories
The Energy Information Administration said May 20 commercial US crude inventories continued to fall, down 2.1 million bbl to 368.5 million bbl in the week ended May 15. That was more than Wall Street's consensus of a 1.2 million bbl draw, but inventories are still above average for this time of year. Gasoline stocks dropped 4.3 million bbl to a below-average 204 million bbl in the same period. Analysts were expecting a decrease of 1.4 million bbl. On the other hand, distillate fuel inventories increased 600,000 bbl to an above-average 148.1 million bbl. The consensus was for a 1.2 million bbl increase in distillates.

In that week, imports of crude into the US increased just 83,000 b/d to 8.8 million b/d. Over the 4 weeks through May 15, US imports of crude averaged 9.3 million b/d, down 453,000 b/d from the same period a year ago.

The input of crude into US refineries fell 315,000 b/d to 14.1 million b/d last week, with units operating at 81.8% of capacity. Gasoline production was relatively unchanged at 8.7 million b/d. Distillate fuel production was stable at 4.1 million b/d.

In EIA's previous weekly report, crude inventories fell 4.6 million bbl primarily because of the drop in oil imports. "Some think that…could be an indication that the Chinese have renewed their efforts to build crude stockpiles. [President Hugo] Chavez's steps to nationalize Venezuelan oil production and possible supertanker delivery delays could also be skewing recent import data," said Pritchard Capital Partners. But with US imports down a second consecutive week, they said, "This theory the Chinese are stockpiling crude may gain momentum."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said the sharp decline in gasoline inventories is the result of not only low production levels, but also because of increased demand to 9.2 million b/d—"the highest weekly level since August 2008." He said, "While we view this as positive for refiners, it is important to note that utilization rates remain well below normal, and refiners can easily increase production. Additionally, gasoline imports rose to their highest level in a month due to improved margins. We remain concerned about near term sector fundamentals due to weak demand for distillate (down 8% year to date) and jet fuel (down 9%)."

Rousseau said the latest EIA regional data show declining gasoline inventories in all regions, with the largest drops in the Midwest and on the Gulf Coast. He said refinery utilization rates along the Gulf Coast fell to 82% from 86%, but rose in the Rockies to 96% from 90%. "It is also worth noting that gasoline imports increased by about 200,000 b/d on the East Coast last week, but still remain below year-ago levels," he said.

Energy changes
Independent refiner Sunoco Inc. is acquiring a 100 million gal/year ethanol plant in New York from a bankrupt ethanol producer. "This follows Valero Energy's much larger ethanol acquisition earlier this year," said Raymond James analysts. "But before you think this is a bullish signal for the ethanol industry, consider what Sunoco is paying: at 19¢/gal of capacity, it is barely 10% of construction cost and is even cheaper than Valero's 61¢/gal purchase price. Bottom line: These assets are changing hands at fire-sale prices."

Raymond James also noted the White House's new fuel efficiency targets for automakers, requiring 5% annual improvements in 2012-16. "By 2016, this equates to 39 mpg for cars and 30 mpg for trucks. While this policy may grab headlines, the reality is that US oil consumption has already been essentially flat for the past decade—in 2008, it was roughly equal to 1999 levels—in part because of a shift to more efficient autos, along with lower energy intensity across the economy. So the new policy basically just codifies a trend that is already underway," the analysts said.

Energy prices
The expiring June contract for benchmark US light, sweet crudes climbed to a new 6-month high of $60.48/bbl in intraday trading before finishing at $59.65, up 62¢ for the day May 19 on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., continued to track the June futures contract, up the same amount to the same finish. The new front-month July crude contract gained 51¢ to $60.10/bbl on NYMEX. Heating oil for June delivery increased 1.09¢ to $1.49/gal. Reformulated blend stock for oxygenate blending (RBOB) for the same month advanced 5.44¢ to $1.81/gal.

However, the June contract for natural gas fell 22.5¢ to $3.91/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 6.5¢ to $3.96/MMbtu.

In London, the July IPE contract for North Sea Brent increased 45¢ to $58.92/bbl. Gas oil for June rebounded by $3.50 to 469.75/tonne.

The average price for OPEC's basket of 12 benchmark crudes escalated by $1.66 to $57.52/bbl on May 19.

Contact Sam Fletcher at samf@ogjonline.com.

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