MARKET WATCH: Crude closes above $70/bbl for 7-month high

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 10 -- Petroleum prices rebounded June 9, generally wiping out losses over the previous two sessions as crude closed above $70/bbl on the New York Mercantile Exchange for the first time in 7 months, buoyed by a weaker dollar and continued optimism that the economy is recovering.

In Houston, analysts at Raymond James & Associates Inc. said, “While the economy has begun showing signs of stabilization, we note that several swing factors including the Organization of Petroleum Exporting Countries’ compliance levels as prices improve and stored crude oil on tankers could add volatility to prices in the near term.” Prices for both crude and natural gas were up in early trading June 10.

Following the close of regular trading June 9, the American Petroleum Institute estimated US crude inventories fell 6 million bbl in the week ended June 5. After the $70/bbl closing, “all that was needed…was a bit of positive numbers [from] API to confirm the breakout” above the previous $60/bbl range, said Olivier Jakob at Petromatrix, Zug, Switzerland. It was further confirmed June 10 by data from the Department of Energy’s Energy Information Administration.

US inventories
The EIA said commercial inventories of benchmark US crude fell 4.4 million bbl to 361.6 million bbl in the week ended June 5. The Wall Street consensus was for an increase of 100,000 bbl. Gasoline stocks dropped 1.6 million bbl to 201.6 million bbl in the same period, contrary to analysts’ expectations of an 800,000 bbl build. Distillate fuel inventories were down 300,000 bbl to 149.7 million bbl, counter to an anticipated increase of 1.5 million bbl.

Imports of crude into the US fell 676,000 b/d to 9 million b/d. In the 4 weeks through June 5, crude imports averaged 9 million b/d, down 631,000 b/d from the same period in 2008.

Input of crude into US refineries increased less than 100,000 b/d to 14.8 million b/d in the latest week, with units operating at 85.9% of capacity. Gasoline production rose to 9 million b/d, and distillate fuel production fell to 3.9 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, “Gasoline inventories unexpectedly declined last week and are now 4% below the 5-year average for this calendar week. However, the reason gasoline stocks have not risen continues to be due to lower production and imports and not improved demand, which was 3% below year-ago levels last week. But if refiners can maintain production discipline, then gasoline margins could remain strong and exceed expectations.”

The latest EIA report amounts to 5 consecutive weeks of draws from US crude stocks (17 million bbl) in addition to the reduction in May of 16 million bbl of crude stored in offshore tankers. “These are not small reductions in stocks, and the crude oil futures contango is narrowing further,” Jakob said. “The July-August WTI contango was down close to 60¢/bbl in overnight trading, and this compares with the $8/bbl contango that we had early in the year. The narrowing of the WTI contango will force more crude oil out of storage (both onshore and offshore) and will improve the rolling economics of the passive investor.”

He said, “Some pension funds are planning to increase their holdings in commodity indices, and with a further narrowing of the crude oil contango, we should expect to see an increase of passive investments into commodities.”

In New Orleans, analysts at Pritchard Capital Partners LLC cited reports earlier this week that seven tankers requested “notices of redelivery” for crude they are holding as part of “the contango trade.” The analysts said, “The unloading of these seven tankers could skew the oil inventory data for the next few months—lead to larger builds; possibly…over the next 1-2 months.

Earlier the EIA raised its 2009 demand forecast by 10,000 b/d to 83.68 million b/d, “which still reflects a 3% decline” from 2008, said Raymond James analysts.

In its short-term energy outlook, EIA said WTI should average $67/bbl in the second half of this year. “Regular-grade gasoline prices are expected to reach their summer seasonal peak in July, with a monthly average close to $2.70/gal. The annual average regular-grade gasoline retail price in 2009 is expected to be $2.33/gal, rising to $2.56/gal in 2010. The monthly average Henry Hub natural gas spot price is expected to stay under $4/Mcf until late in the year as abundant natural gas supplies converge with weak demand driven by an 8% decline in industrial sector consumption. The price is projected to increase from an average $4.13/Mcf in 2009 to an average $5.49/Mcf in 2010,” said Pritchard Capital Partners.

In other news, Jakob reported an unconfirmed claim by militants of an overnight attack on a Chevron Corp. flow station in Nigeria, and a statement by the oil minister of Kuwait that OPEC would not increase production unless crude was to reach $100/bbl.

Energy prices
The July contract for benchmark US light, sweet crudes rebounded by $1.92 to $70.01 June 9 on NYMEX. The August contract climbed $1.71 to $70.74/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.92 to $70.01/bbl. Heating oil for July delivery rose 3.97¢ to $1.81/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month increased 3.07¢ to $1.97/gal.

The July natural gas contract was unchanged at $3.73/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢, but the closing prices was essentially unchanged at an average $3.53/MMbtu.

Pritchard Capital Partners said, “The fear of a flood of LNG arriving at US terminals in coming months is subsiding slightly as North American Terminals [Management Inc.] reported that only 56 bcfe arrived in the US in April. However, the long term picture is less clear as OAO Gazprom officials said they plan to supply the US with 10% of its natural gas needs with LNG. Obviously, Gazprom’s plan is negative for the long term outlook for natural gas, but right now Russia is not the most reliable natural gas counterparty considering their record of supplying the European Union with natural gas.”

In London, the July IPE contract for North Sea Brent crude increased $1.74 to $69.62/bbl. Gas oil for June gained $9.50 to $555.25/tonne.

The average price for OPEC’s basket of 12 reference crudes was up $1.67 to $68.69/bbl on June 9.

Contact Sam Fletcher at samf@ogjonline.com.

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