MARKET WATCH: Upbeat economic outlook lifts energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 27 -- Encouraged by a strong rally in the equity market, energy commodity prices continued climbing July 24, with the front-month crude contract closing above $68/bbl on the New York market. In London, North Sea Brent crude topped $70/bbl.

“Crude rallied on signs the global economy continues to show signs of strengthening,” said analysts at Pritchard Capital Partners LLC, New Orleans. Moreover, they said, “China continues to snap up crude resources outside the US. China will pay Ecuador a $1 billion advance in the first week of August in return for 3 million bbl of crude per month, and it emerged that the China National Petroleum Corp. will take the majority stake in Iraq’s Rumaila oil field from BP PLC.” This, said analysts, “reinforces that any available energy asset outside of the continental US will attract Chinese interest.”

Ecuador’s state-owned Petroecuador agreed to export 2.88 million bbl/month of Oriente and Napo crude to China for 2 years. The $1 billion advanced payment is 28% of the total value of that deal (OGJ Online, July 24, 2009).

On July 24, crude prices rose to their highest point in more than 3 weeks and were still climbing in early trade July 27, said analysts in the Houston office of Raymond James & Associates Inc. “The dollar's continued decline against other major currencies is also helping to increase oil prices. As the week progresses, continue to look for oil to move in tandem with major global stock indices,” they said.

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, “After rebounding in the previous week at the lower band of the $60-70/bbl range, West Texas Intermediate advanced last week towards the higher band in an intraweek pattern (stabilization in the first half of the week, rally in the second) similar to the previous week.” In the New York market, the front-month crude contract gained $3.53/bbl last week on top of a $3.70/bbl increase the week before. In London, Brent was up $4.94/bbl for the week. Heating oil finished the week up $5.98/bbl in New York. Reformulated blend stock for oxygenate blending (RBOB) gained $6.21/bbl in the same period. The price of the front-month natural gas contract finished the week essentially unchanged, however.

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, “Once again the atmosphere has changed with many investors suddenly more upbeat about the US and world economic outlook. The stock market bull-run was kicked-off by better than expected earnings at a number of [major nonenergy] companies…. Also, some economic data was better then expected, and the Federal Reserve raised its forecast of growth in 2010 and lowered the amount of contraction in 2009. Despite this apparent outbreak of happiness, there are still plenty of skeptics out there who believe that even if the bottom of the recession is near the recovery will be slow and could even be reversed when the stimulus packages lavished on economies around the world wear off.”

KBC analysts warned, “If the current more positive outlook for the global economy turns sour—and there are many respected commentators still talking about the W-shaped recession—the much anticipated oil demand will be pushed further out into the future and the sheer weight of stocks could lead to a major correction in product prices that will drag crude down too.”

Energy prices
The September contract for benchmark US light, sweet crudes increased 89¢ to $68.05/bbl on the New York Mercantile Exchange. The October contract gained 92¢ to $69.79/bbl. On the US spot market, WTI at Cushing, Okla., was up 44¢ to $66.55/bbl. Heating oil for August delivery increased 1.69¢ to $1.78/gal on NYMEX. RBOB for the same month inched up 0.27¢ to $1.92/gal.

The August natural gas contract advanced 14.5¢ to $3.70/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 23.5¢ to $3.39/MMbtu.

The gas futures contract recovered some of its previous losses “on reports showing the natural gas electrical generation burn increased 4 bcfd week-on-week over the past week,” said Pritchard Capital Partners. “Natural gas is likely to continue to pick up power generation market share from coal as the US emphasizes greener energy. The increase in power generation demand for natural gas to 4 bcfd is above earlier forecasts for 1-2 bcfd demand from coal generators switching to natural gas and makes up in small way for nonexistent domestic industrial demand. Should the trend develop is positive for natural gas. August bid-week for Henry Hub will be set this week. June and July were $3.32/Mcf and $3.54/Mcf, respectively. A forecast of warmer than normal weather may bode well for stronger natural gas prices.”

In London, the September IPE contract for North Sea Brent crude gained $1.07 to $70.32/bbl. Gas oil for August was up $5.75 to $568.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 reference crudes increased $1.34 to $67.80/bbl on July 24. So far this year, the OPEC basket has averaged $52.48/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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