MARKET WATCH: Energy prices rise with economic recovery

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 4 -- Energy prices increased in virtually every category May 3 in the New York market, with natural gas up 2%, following reports indicating a strengthening economy.

The Institute for Supply Management reported US manufacturing activity rose to 60.4 in April, up from 59.6 in March—the ninth consecutive month of increases and the strongest number in 6 years. Also the US Department of Commerce reported consumer spending rose 0.6% in March—the largest gain in 5 months

On May 4, DOC reported orders to US factories rose 1.3% in March, compared with expectations of a 0.1% decline. Excluding the volatile transportation sector, analysts said orders jumped 3.1% in the biggest increase since August 2005. Moreover, The National Association of Realtors’ seasonally adjusted index of sales of previously occupied homes rose 5.3% to the highest level since October and up 21% from March 2009.

Crude hit an intraday high after the ISM index increase was reported, but most of that gain later disappeared amid expectations the Energy Information Administration will report May 5 another increase in oil inventories. “Incentivized by high crack-spreads, refining utilization has been going up recently,” said analysts at Pritchard Capital Partners LLC in New Orleans. “We expect some pull-back in prices at these levels, as despite high refinery runs, [crude] inventory levels have continued to expand at a fast pace signaling that demand is still slow to recover while the market remains well supplied. Additionally, concerns about UK’s election resulting in a hung parliament, might weigh on the market negatively over the coming days.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “As expected, trading in crude futures yesterday was all about reversing the trades that had been put in front of the weekend in anticipation of potential restrictions to US crude oil imports. With the [Deepwater Horizon] oil spill moving East rather than West [in the Gulf of Mexico] over the weekend, West Texas Intermediate was pushed back into a heavy discount to North Sea Brent.”

So far the spill has not disrupted US imports of crude. With an increased build of US crude inventories expected, Jakob said, “The front contango in WTI is falling to a level wider than before the spill scare.”

He added, “With Brent crude oil driven higher by the selling on the Brent-WTI arbitrage, and the euro continuing to fall on the Greek concerns, Europeans are getting hit with the worse oil prices since the spring of 2008.”

Meanwhile as public and political attention focused on the gulf spill, Jakob reported ashes from the Iceland volcano “have started to reappear” in European skies. “The airspace closures are relatively limited for now (Ireland and part of UK), but the volcano will need to be put once again on the radar screen,” he said

Energy prices
The June contract for benchmark US light, sweet crudes climbed as high as $87.15/bbl in intraday trading May 3 before closing at $86.19/bbl, up just 4¢ for the day on the New York Mercantile Exchange. The July contract gained 79¢ to $89.15/bbl. On the US spot market, WTI at Cushing, Okla., was up 4¢ to $86.19/bbl. Heating oil for June delivery increased 2.94¢ to $2.35/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 3.57¢ to $2.44/gal.

The June natural gas contract snapped its recent decline, rising 8¢ to $4/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 1¢ to $3.90/MMbtu. Pritchard Capital Partners said, “We expect prices to strengthen slightly on buying support from power and industrial sector, coupled with speculations that the oil spill in the gulf may induce more production shutdowns.”

In London, the June IPE contract for North Sea Brent crude increased $1.50 to $88.94/bbl. Gas oil for May gained $11.75 to $743.50/tonne.

Raymond James analysts noted, “Brent crude, which has traded at a premium to WTI only 10% of the time over the last 20 years, closed at a 3% premium to WTI due to increased European and Asian demand, higher non-OPEC production, as well as ever-increasing US crude in storage.”

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up 23¢ to $84.36/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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