MARKET WATCH: Crude price drops, ending short rally

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 1 -- Oil prices fell May 28, ending a 2-day rally in the New York market, with crude down 0.8%, on the eve of the extended Memorial Day holiday weekend in the US that usually marks the start of the summer driving season.

Both crude and the broader equity prices fell as the euro declined 0.5% against the US dollar after Fitch Ratings Ltd. downgraded Spain’s credit rating one level to AA+ from AAA. “Crude also was weighed down by the Commerce Department’s report that showed consumer spending was flat month-over-month in April vs. [analysts’] consensus of a 0.3% increase,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. However, the May Consumer Sentiment index increased to 73.6 from 72.2 in April, while the consensus was an increase to 73.3.

“We believe that the events in Europe will continue to affect crude and the broader markets, although, the increased demand during the driving season, expansion of the US economy, and improving consumer sentiment will provide price support at these levels,” Sharma said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “In the end it is the fear of Europe that is currently driving the global markets more than the economic greenshoots in the US, and this fear of Europe will price itself first in the euro-dollar [exchange rate] and then in equities.”

In early trading on June 1, analysts in the Houston office of Raymond James & Associates Inc. reported crude was down 2% “as Chinese growth prospects temper,” while natural gas was up slightly.

In the week ended May 28, natural gas prices were up a total 23.5¢ or 5.7% from the previous week “on strong cash demand due to hotter-than-normal weather in the Northeast and north-central US,” Sharma reported. “Natural gas strengthened despite a bearish [gas production] report from the Energy Information Administration on anticipation that warmer-than-normal weather will continue through most of June.”

Texas and Louisiana led the production increase contributing 400 MMcfd and 200 MMcfd sequential gains respectively. “Driven by the activity in Haynesville shale, Louisiana continues to see the largest production gains posting 3.8% sequential increase and massive 47.1% year-over-year increase,” said Sharma.

Lower 48 gas production in March hit a record high of 64.7 bcfd, upset another record high at 64.7 bcfd, up 1.4 bcfd, or 2.2% from March 2009 and 800 MMcfd, or 1.3% from February this year. “Lower 48 supplies have continued to grow due to increased drilling activity and are up 2.7 bcfd, or 4.3%, since December 2009. “The natural gas rig count has continued to uptick and now stands at 967 rigs for the week ending May 28, while the horizontal natural gas rig count is at all-time high at 607,” said Pritchard Capital Partners.

“Although we expect that there would be some pull back (approximately 100 rigs) in natural gas drilling activity between now and yearend, we now believe that the US supplies this year will average approximately 1 bcfd higher than the last year, primarily due to the continuing strong onshore drilling activity and gains in drilling efficiencies,” said Sharma.

Meanwhile, the US Climate Prediction Center projects “one of the most active tropical storm seasons on record” this year, providing further support to energy prices.

Energy prices
The July contract for benchmark US light, sweet crudes dropped 58¢ to $73.97/bbl May 28 on the New York Mercantile Exchange. The August contract was down 46¢ to $75.16/bbl. Heating oil for June delivery declined 1.92¢ to $1.98/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 1.91¢ to $2.02/gal. The July natural gas contract gained 4.7¢ to $4.34/MMbtu on NYMEX. Spot market prices for both oil and gas were not available for May 28, however.

In London, the July IPE contract for North Sea Brent crude fell 64¢ to $74.02/bbl as its premium over West Texas Intermediate narrowed. Gas oil for June increased $3 to $636/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $1.26 to $71.88/bbl on May 31 when the US market was closed for the holiday.

Contact Sam Fletcher at samf@ogjonline.com.

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