Crude tests $73/bbl

Sam Fletcher
OGJ Senior Writer

The July contract for benchmark US light sweet crude hit an intraday high of $73.23/bbl June 11 on the New York Mercantile Exchange before closing at $72.68/bbl, up $1.35 for the day after the International Energy Agency in Paris increased its prediction of global oil demand for the first time in 10 months.

However, oil closed at to $72.04/bbl June 12 after the Organization of Petroleum Exporting Countries reported its production increased for the second consecutive month, up 135,000 b/d to 28.27 million b/d in May. The 11 OPEC members, excluding Iraq, increased their production by 118,800 b/d to 25.9 million b/d in May.

IEA increased its oil demand forecast by 120,000 b/d to 83.3 million b/d. The latest total is down 2.9% from 2008 demand, compared with IEA’s previous prediction of a 3% decline (OGJ Online, June 11, 2009).

OPEC expects world oil demand growth to be down 1.6 million b/d in 2009, broadly unchanged from its previous report. It revised its 2009 projected growth for the world economy up by a mere 0.1%, still down 1.3% from 2008 levels. It expects non-OPEC production to increase by 200,000 b/d above 2008 production.

The 11 OPEC members excluding Iraq increased their production by 118,800 b/d to 25.903 million b/d in May. Analysts expect compliance with official production quotas will continue to erode as crude prices rise.

The average price for OPEC’s basket of 12 reference crudes surged almost 14% in May to $56.98/bbl, its highest monthly average in 7 months, driven by the widespread hope for a recovery in petroleum demand. OPEC’s basket price was up 68¢ to $70.87/bbl on June 11. Officials at OPEC reported the tanker market rebounded in May. “The [very large crude carrier] sector continued to suffer the most from the global economic crisis and OPEC output adjustments. Clean spot freight rates rose by 37% on average. After reaching a high level, storage at sea lost momentum towards the end of the month due to the narrowing of the contango structure in the crude futures market,” officials said.

May market increased
Analysts in the Houston office of Raymond James & Associates Inc. said, “Commodity prices rallied in May and the energy indices took note, outperforming the broader market by over 10%. While we believe both oil and natural gas may be in for short-term corrections in the coming weeks, the bifurcation between the two continues to grow. Oil is simply waiting for demand to recover before climbing even higher. Natural gas is headed towards full storage, and prices will plummet.”

They said, “Oil has ripped for 4 months in a row now, jumping 30% in May (and already up 6% in June). Oil has more than doubled off its bottom from back in February. While the global economy has started to show ‘green shoots’ of recovery, we still believe that a dramatic rebound in oil demand isn't in the cards for 2009, and a short-term pullback is likely given worldwide storage levels, which are still full.”

Raymond James observed, “The global economic crisis continues to obscure oil demand, with virtually no near-term visibility. Despite recent stimulus packages around the world, we assume depression-era year-over-year demand destruction of 3.5%. In spite of brimming worldwide inventories, oil has spiked to over $70/bbl over the last few months (over 100% above its February low). However, we believe global demand will need to stabilize (and possibly recover) before oil prices can be maintained at this level. We don't expect to see this until 2010, hence our $52.50/bbl second-half forecast. Even if oil prices saw a short-term pullback, we believe the long-term story is intact and accordingly model $65/bbl in 2010. Indeed, if anything, given the number of marginal supply projects that have been shelved, the long-term outlook for crude is actually stronger.”

As for natural gas, Raymond James analysts said, “While the fundamentals continue to deteriorate (year-over-year storage surplus quickly approaching 600 bcf), natural gas rode a technical rally higher in May, finishing the month up 14%. We believe this is solely the result of a lot of new money entering the market and still believe full storage will drive prices below $3/Mcf toward the end of summer.”

They said, “Despite our assumption of a 70% peak-to-trough decline in the gas rig count, we believe shut-ins may still total 500-750 bcf. To force such large shut-ins, natural gas prices would need to fall well below $3/Mcf. Moreover, LNG imports could be substantially above our estimates, causing an even higher amount of shut-ins. For 2010, the outlook is still uncertain.”

(Online June 15, 2009; author’s e-mail: samf@ogjonline.com)

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