MARKET WATCH: Gas, oil prices escalate

Sam Fletcher
OGJ Senior Writer
HOUSTON, May 4 -- The June natural gas contract jumped by 5.1% on May 1 on the New York market amid indications the economic downturn is slowing and fuel demand may soon increase.

The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index rose to 40.1 in April from 36.3 in March (OGJ Online, May 1, 2009). A reading below 50 indicates a contraction.

This marked the 15th consecutive month of contraction in manufacturing, but in April the pace was slower than expected due to a rise in new orders. The private trade group's figures suggest the economic decline may be moderating.

In New Orleans, analysts at Pritchard Capital Partners LLC said bearish fundamentals in the gas market are about to shift with US production levels expected to drop because of the 57% decline in the US rig count and the sizeable production shut-ins so far this year.

Crude prices continued a 3-day rally in New York with a 4% price increase May 1, driven by the stronger-than-expected economic data and a weak US dollar. However, both oil and gas prices were down in early trading May 4.

In Houston, analysts at Raymond James & Associates Inc. pointed out crude inventories are at all time highs while oil demand remains depressed, down 5.4% from year ago levels in February. Moreover, they said oil production among members of the Organization of Petroleum Exporting Countries apparently peaked in the first quarter of 2008, with non-OPEC production having topped out in 2007.

"Of course, we cannot definitively prove that this marks the all-time peak (that is, that global oil production will never again surpass the 79.3 million b/d mark)," the analysts conceded. "That is something that will only become clear with the benefit of years of hindsight as was the case with the US in the 1970s. However, it is entirely intuitive to conclude that if both OPEC and non-OPEC production posted declines against the backdrop of $100/bbl oil—when the obvious economic incentive was to pump at full blast—those declines had to have come for involuntary reasons such as the inherent geological limits of oil fields. To summarize, we believe that the oil market has already crossed over to the downward-sloping side of Hubbert's Peak [based on the production curve model developed by geophysicist M. King Hubbert]."

Raymond James analysts added, "With demand as weak as it is now, of course, inadequate future supply is hardly what the oil market is worrying about these days. Nonetheless, reaching peak oil still represents a transformative moment in the history of the oil market, and, if we're right that this moment is already behind us, it is only a matter of time before prices begin to reflect the reality that oil scarcity may become a fact of life in the not-too-distant future."

Energy prices
The June contract for benchmark US light, sweet crudes escalated $2.08 to $53.20/bbl May 1 on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., was up the same amount to the same price. The July crude contract advanced by $2.26 to $54.54/bbl on NYMEX. The new front-month June contracts for heating oil and for reformulated blend stock for oxygenate blending (RBOB) both increased 5.16¢ to $1.39/gal and $1.52/gal, respectively

The June natural gas contract climbed 17.3¢ to $3.55 MMbtu on NYMEX, far outstripping combined losses from the previous two sessions. On the US spot market, gas at Henry Hub, La., gained 7¢ to $3.32/MMbtu.

In London, the June IPE contract for North Sea Brent crude increased $2.05 to $52.85/bbl. The May gas oil contract gained $9.75 to $437.75/tonne.

The average price for OPEC's basket of 12 reference crudes increased 5¢ to $50.41/bbl on May 1. So far this year, the OPEC barrel has averaged $44.85/bbl.
Contact Sam Fletcher at samf@ogjonline.com

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