MARKET WATCH: Crude climbs above $70/bbl again in New York market

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 26 -- The near-month price for benchmark US crude futures climbed above $70/bbl again in the New York market with confirmation of additional disruption of oil exports from Nigeria and the euro recovering from its earlier losses against the US dollar.

Royal Dutch Shell PLC confirmed militant attacks damaged a pipeline carrying benchmark Bonny crude to the key export terminal in Nigeria. Olivier Jakob at Petromatrix, Zug, Switzerland, earlier reported recent attacks on oil facilities in the delta have likely reduced Nigeria’s current production to 1.3-1.4 million b/d, down from 1.9 million last July and 1.8 million in the first quarter of this year. “The attacks on the pipeline infrastructure are also having an impact on the running of the local refineries, Warri and Port Harcourt are said to be shut, and Kanuda [is reported] running on stocks, which will run out in the next 2 weeks and provide some support to the Atlantic Basin light-end products,” he said (OGJ Online, June 25, 2009).

Jakob said June 26, “We have been writing for the last 10 days that markets were not pricing enough of a risk premium on Nigeria.” He said, “If you are a refiner on the US East Coast running on Nigeria light crude oil, you do not change your slate overnight to Arabian Heavy, and Saudi Arabia will anyway not move [to increase production] before global stocks have been reduced. One way or another, Nigerian disruptions should lead to an acceleration in the reduction of light, sweet crude oil stock, and this provides a risk for an acceleration in the reduction of the futures contango.”

A flatter curve on crude futures prices won’t push oil costs back to $150/bbl, “but it will bring more buying power on any dips as it reduces the holding risk in passive length,” Jakob said. “Crude oil physical premiums are also indicating that the current oil prices are not just financial speculation or a trade on the dollar. Russian Urals [crude] historically trades at a few dollars discount to [North Sea] Brent; in July of last year the spread widened down [by] $6/bbl…. Today Urals is trading almost at par to Brent.”

Jakob is “cautious” in his outlook for the Nigerian government’s offer of amnesty to militants. “There is money involved, hence some militants might go for that; but the ones that lay down their arms only leave the territory and its associated business to the ones that don’t, so we will remain skeptical about the whole deal,” he said. Meanwhile, the rebel Movement for the Emancipation of the Niger Delta made an overnight bomb attack on a wellhead in Shell’s Afremo oil field.

Jakob added, “Crude oil was as well supported [June 25] by a rebound in the gasoline crack that had been recently under severe pressure and was a major catalyst to the flat price correction of last week.” Refinery outages in Nigeria could translate into higher import requirements. “also supported by brief power outages at the Valero and Marathon, Tex., refineries,” Jakob said. “The heat wave continues in the US Gulf Coast. Under the heat, roads are buckling from Texas to Louisiana, and power requirements are very near all time record highs. The heat wave is expected to continue into the weekend, and we will price a premium for the risk of refinery outages under these severe conditions,” he said.

Analysts at Pritchard Capital Partners LLC, New Orleans, reported higher prices for both crude and natural gas in early trading June 26. They too acknowledged the role of strengthening gasoline prices and disruption of Nigerian exports in pushing up crude prices. However, they said, “Of greater interest is Sinopec [Corp.]’s purchase of Addax Petroleum [Corp.] for $7.19 billion. The Addax acquisition will give China’s Sinopec reserves in Iraq’s Kurdistan region and West Africa. In addition to the Addax acquisition, in the past 2 months China has extended $10 billion loans to both Rosneft (Russia’s oil producer) and Petrobras [Brazil’s national oil company]. All three transactions highlight China’s desire to secure national energy security and that for major resource plays outside of the US there is an underlying bid with deep pockets.”

The price of the front-month natural gas futures contract rose June 25 on the New York market in response to the Energy Information Administration’s report of a lower than expected injection of gas in to US underground storage during the week ended June 19, said Pritchard Capital Partners [OGJ Online, June 25, 2009]. “Working gas volumes in storage [are] at an all-time high for June, as inventories already exceed the previous record for the end of the month of 2.615 tcf set in 2006. The high levels of natural gas storage has captured the focus of the market and is one of the leading catalysts to support the bearish case for natural gas, but the storage level should be worked through as production declines begin to impact supplies,” they said.

In Houston, analysts at Raymond James & Associates Inc. said the Waxman-Markey greenhouse gas bill set for House vote June 26 or over the weekend “could be a game changer for the American way of life, not to mention the coal industry.” They said, “The sweeping energy bill calls for a 17% reduction in carbon emissions by 2020, 42% reduction by 2030, and 83% reduction by 2050 relative to 2005 levels. As an indication of just how controversial the cap-and-trade provisions are, it is still not entirely clear whether the Democratic leadership has enough votes within their own party. The bill has been watered down somewhat since its introduction back in March, but it still poses a very significant incremental cost to many industries over time. Bottom line: If this cap-and-trade legislation passes the House, it still needs to pass the Senate (which is an even more difficult task given that 60 votes are needed to avoid a filibuster). If it gets past both, then over time it will likely cause a major increase in electricity prices among other things, which would inherently restrain economic growth as consumers spend less on food, cars, manufactured goods, etc.”

In other news, the US Department of Commerce reported orders for airplanes and machinery produced a better-than-expected 1.8% increase in durable-goods orders in May, the third increase in durable-goods orders in 4 months (OGJ Online, June 25, 2009). However, orders for big-ticket items were down 5.1% in May from December.

Energy prices
The August contract for benchmark US light, sweet crudest recouped $1.56 to $70.23/bbl June 25 on the New York Mercantile Exchange. The September contract regained $1.58 to $71.08/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.56 to $70.23/bbl, in tandem with the New York futures market price. Heating oil for July delivery gained 3.82¢ to $1.78/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month was up 5.58¢ to $1.90/gal.

The July natural gas contract escalated by 8.3¢ to $3.84/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 1¢ to $3.81/MMbtu.

In London, the August IPE contract for North Sea Brent crude increased $1.45 to $69.78/bbl. Gas oil for July gained $3.50 to $568/tonne.

The average price for OPEC’s basket of 12 reference crudes rose 53¢ to $68.54/bbl on June 25.

Contact Sam Fletcher at samf@ogjonline.com.

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