MARKET WATCH: Crude manages small gain despite economic worries

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 25 -- The front-month July crude contract managed a small gain May 24 in the New York market despite a 1.4% strengthening of the US dollar and a continued drop in the Dow Jones Industrial Average as the danger of a military confrontation between North and South Korea was added to worries of an economic meltdown in Europe.

“Despite a rising dollar and falling equities (Standard & Poor’s 500 down 1.3%), crude managed to end the day slightly in positive territory…while energy stocks continued to get pummeled,” said analysts in the Houston office of Raymond James & Associates Inc. “Additionally, concerns over Europe's debt woes continue to keep money out of the markets as the dollar has gained another 1% on the euro [in early trading May 25].”

They said, “After reports that North Korea's military was told last week to become combat-ready, Asian markets tumbled this morning, which is already weighing on US stocks.” Weakness of the euro put additional downward pressure on crude prices, which were down more than 3% in early trading May 25 while gas prices remained relatively flat.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “If Europe was not enough of a problem, Asia is now also starting to attract a higher risk premium over the agitations between North and South Korea. There is not much oil being produced in North or South Korea, hence the current agitation will be mainly supportive for the dollar and negative for stocks, hence negative for oil.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, attributed the May 24 increase in the front-month crude price to an improved economic outlook in the US and speculation China may not tighten its economy in the near future. “Oil climbed after the Shanghai Composite Index achieved its largest gain since Oct. 9, rising 3.5% and pulling oil up with it, after an official from China’s Development and Reform Commission signaled that given the current global economic environment, China would be cautious in introducing tightening measures,” Sharma said. “The economic recovery on the domestic front is expected to be stronger than previously estimated, as the latest survey by the National Association of Business Economics showed that the US economy would expand at 3.2% vs. the February estimate of 3.1%.”

Sharma said, “As domestic financial worries are slowly abating, consumer spending is expected to increase to 2.6% vs. a prior estimate of 2.2%, while savings rates are expected to drop to 3.4% from prior estimates of 4.6%. We expect prices to strengthen further on anticipated positive signs from the other economic indicators…released later in the week and on higher demand from China and the US, which together account for one third of global demand.”

Meanwhile, Jakob noted, “The West Texas Intermediate contango and the WTI premium to [North Sea] Brent narrowed yesterday. There is growing expectations that some floating storage on crude (apart from the Iranian build up) could start to reappear, and that would then pressure Brent more than WTI in the first phase of the build up.” However, he expects a continued build of crude in storage at Cushing, Okla.

Meanwhile, the price of the near-term natural gas contract dropped for a fifth day on the New York market “on supply concerns as the drilling activity is not showing any signs of abatement,” said Sharma. The number of US rigs drilling for gas in the week ended May 21 rose to 969, “only 4 below the 1-year high of 973 reached in the week ending Apr. 16,” he said. “Although the cooling demand is expected to be stronger than normal during the current week, it is expected to drop off sharply during the upcoming Memorial Day weekend. Due to the fuel-switching by the power generators, we believe that prices will strengthen at these levels and continue to trade in the $4/MMbtu range.”

Raymond James analysts cited a recent Bloomberg news service report that UK natural gas prices have risen 9% this month—“thanks to a ‘scary’ decline in North Sea production”—while US prices have fallen 2.3%. US inventories are brimming while stockpiles in Britain are at their lowest level in more than 5 years. Consequently, the price spread between UK and New York gas has risen to a 6-month high of $2.30/MMbtu.

“Because any spread over $1 incentivizes flexible LNG cargos to be redirected to Europe, this likely means a decrease in US imports in the back half of the year,” said Raymond James analysts. “While the magnitude has set a new 6-month record, the pricing spread is not a surprise and we are currently modeling LNG imports as flat year-over-year this summer.”

Energy prices
The July contract for benchmark US sweet, light crudes increased 17¢ to $70.21/bbl May 24 on the New York Mercantile Exchange. The August contract, however, lost 5¢ to $71.62/bbl. Contracts for subsequent months also were down but still in contango.

On the US spot market, WTI at Cushing was down 86¢ to $66.88/bbl. Heating oil for June delivery inched up 0.26¢ but again closed virtually unchanged at $1.90/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 0.96¢ to $1.97/gal.

The June natural gas contract dropped 1.8¢ to $4.12/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 4.5¢ to $4.08/MMbtu.

In London, the July IPE contract for ea Brent crude fell 51¢ to $71.17/bbl. Gas oil for June dropped $6 to $604.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 12¢ to $68.59/bbl. So far this year, the price of OPEC’s basket of crudes has averaged $77.01/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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