MARKET WATCH: Crude oil contract ends rally; natural gas advances

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 14 -- The front-month crude oil contract closed below $74/bbl June 11, ending a 3-day rally in the New York market as Standard & Poor’s 500 index rallied late in the day in the equity market despite an unexpected drop in May retail sales—the first in 8 months.

That session “did bring some positive macro news, as consumer confidence rose to its highest levels in over 2 years during May,” said analysts in the Houston office of Raymond James & Associates Inc. “Markets are positioned to continue their gains from last week, as stock futures and Asian-European markets were trading up this morning.”

The front-month gas contract rebounded after falling in the previous session and continued climbing in early trading June 14 as the euro advanced against the US dollar. “For the week ahead, look for the broader market to take its cues from data on US housing starts, industrial production, and consumer-producer prices,” Raymond James analysts said.

The Obama administration’s current ban on drilling in US waters 500 ft or deeper likely will last longer than the 6 months stipulated, with “a gradual return in the second half of 2011.” The moratorium “cannot and will not be permanent,” the analysts reported. “Whatever the tactical political advantages of the moratorium for the Obama administration, the macroeconomic damage of this policy response is equally real, and eventually the political pushback will begin to bite.”

They said, “From the standpoint of energy independence, trade deficits, and jobs, it is clear that a prompt return to deepwater drilling is in the Gulf Coast's and America's national interest. The sooner the White House recognizes this salient fact, the better.”

Raymond James analysts added, “Regardless of the exact timing of the moratorium, the repercussions will be widespread and costly.” They said, “Stock corrections have generally been even larger than our earnings reductions (with the Oil Service Index down nearly 25%), and diversified; offshore drilling and manufacturing companies with offshore exposure generally look even more attractive than before the spill.”

In other news, a Chevron Corp. pipeline in Salt Lake City, Utah, spilled 500 bbl of crude over the weekend. The pipeline leak was quickly contained, and cleanup of the spilled oil is in process. Meanwhile, the June 7 rupture of the 36-in. Enterprise Products Partners LP pipeline in Johnson County, Tex., has been repaired. One construction worker was killed and 8 more were injured when the pipeline erupted in flame. The Texas Department of Public Safety reported the workers were drilling holes for overhead transmission lines and struck the underground pipeline.

Energy prices
The July contract for benchmark US light, sweet crudes traded at $73.26-75.64/bbl June 11 in the New York Mercantile Exchange before closing at $73.78/bbl, down $1.70 for the day. The August contract dropped $1.34 to $75.34/bbl. Prices for subsequent months declined but remained in contango. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.70 to $73.78/bbl. Heating oil for July delivery declined 2.75¢ to $2.01/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month decreased 2.08¢ to $2.05/gal.

The July natural gas contract regained 13.4¢ to $4.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 3.5¢ to $4.72/MMbtu.

In London, the July IPE contract for North Sea Brent crude lost 94¢ to $74.35/bbl, again at a premium over WTI on NYMEX. Gas oil for July fell $8.75 to $639.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 8¢ to $72.29/bbl. So far this year, OPEC’s basket price has averaged $76.24/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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