MARKET WATCH: Crude oil price climbs; natural gas price falls

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 17 -- As traders shrugged off a bearish government report of US oil inventories June 16, the front-month crude contract climbed to a 5-week high closing above $77/bbl. Natural gas, meanwhile, lost momentum, dropping 4% to below $5/MMbtu in the New York market.

The Energy Information Administration said commercial US crude inventories increased by 1.7 million bbl to 363.1 million bbl in the week ended June 11, compared with a Wall Street consensus for a 1 million bbl decline. US gasoline stocks dropped 600,000 bbl to 218.4 million bbl, while the market expected no change. EIA said distillate fuel inventories climbed 1.8 million bbl to 156.6 million bbl. The Wall Street consensus was for a 1 million bbl increase (OGJ Online, June 16, 2010).

“Crude inventories for the week rose by 1.7 million bbl, driving the majority of the build,” said analysts in the Houston office of Raymond James & Associates Inc. “Energy stocks traded higher most of the day but had a lackluster ending and closed just below the flat broader market.”

EIA reported June 17 the injection of 87 bcf of natural gas into US underground storage in the week ended June 11, slightly lower than the consensus. That increased working gas in storage to 2.54 tcf, up 2 bcf from the storage figures a year ago and 313 bcf above the 5-year average.

Natural gas fell for the first time in 4 days as it became more economical to burn coal than gas in most parts of the US. “The baseload fuel-switching parity price for natural gas is around $4.50[/MMbtu] at $60 Central Appalachian coal and rises approximately 6¢ for every dollar increase in coal prices,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “Natural gas was also weighed down by a bearish report from the Commerce Department, which showed that housing starts fell by 10% to a 593,000 annual rate in May, while economists were expecting an annual rate of 648,000.”

BP under pressure
Raymond James analysts said the agreement by BP PLC executives to suspend dividend payments to shareholders for the rest of this year and not pay the first quarter dividend already declared and to make quarterly cash payments into the $20 billion claims fund administered by an independent third party may defuse some of the harsh political rhetoric against the company, at least from the White House.

“As far as the cash impact of the agreement, BP will save about $8 billion from the suspended dividend (over three quarters) and also plans to cut capital spending by 10% in addition to accelerating asset sales. The company will be responsible for no more than $100 million in claims from workers laid off due to the deepwater drilling moratorium [imposed by Obama]. However, the initial $20 billion is by no means a ceiling for claims and does not account for the fines and penalties the company will likely be facing over the next several years,” Raymond James reported.

Raymond James analysts noted an “interesting article” in the June 17 New York Times reporting annual oil spills the volume of the 1989 Exxon Valdez disaster are estimated to have occurred in the Niger Delta for the last 50 years. “There is a great deal of controversy as to whether the leaks are due to negligent pipe maintenance by some of the oil producers or whether it's a result of sabotage and thievery,” said Raymond James analysts. “Regardless, the situation in Nigeria represents a useful comparison to the current crisis in the Gulf of Mexico.”

Meanwhile, Apache Corp. Chairman and Chief Executive Officer Steve Farris expressed doubt any deepwater drilling will occur in the Gulf of Mexico if Congress does require a $10 billion liability policy in the future. “At least, [Apache] does not intend to drill in the deepwater if that becomes a reality and at least four other major deepwater gulf players have expressed the same sentiment,” Sharma reported. Apache might keep all of its present deepwater wells, however, Farris said.

Farris expects increased regulation of casing program design, more testing of blowout preventers, and fewer companies drilling deepwater wells in the gulf. Those who do will likely to have fewer partners “to control the risk of an event,” he said.

Pritchard Capital Partners reported, “From a macro standpoint there are concerns that industry’s willingness to take risks to find new supplies would be impacted and that government needs to take that factor into account. Liability all the way up the chain to the chief executive officer will hamper deepwater investment in [Farris’s] view. Unlike Sarbanes Oxley, which has an out for honest mistakes, the level of accountability for accidents looks nearly unreasonable and aspects of the proposed laws will be a major deterrent to drilling.”

Energy prices
The July contract for benchmark US light, sweet crudes gained 73¢ to close at $77.67/bbl June 16 on the New York Mercantile Exchange—“the highest settlement price since May 5 on a product-driven rally,” Sharma said. Crude reached an intraday high of $78.13/bbl “before profit-taking pulled it down to the settle. The increased political risk to crude production in the US is also causing anxiety in the market, propelling prices higher,” he said. The August contract increased 81¢ to $78.72/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 73¢ to $77.67/bbl.

Heating oil for July delivery climbed 4.16¢ to $2.11 gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 2.37¢ to $2.15/gal. The July natural gas contract dropped 21.1¢ to $4.99/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 1¢ to $5.11/MMbtu.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 98¢ to $74.15/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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