MARKET WATCH: Crude oil prices continue to climb in mixed market

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 22 -- The front-month crude oil contract on June 21 soared to the highest intraday price since May 5 as it challenged $79/bbl in early trading on the New York market “on speculation that the stronger yuan and cheaper dollar would expand domestic consumption and imports in China,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston.

“Crude was also boosted from the euro’s strength against the dollar in addition to the absence of bad news from Europe over last few weeks, which has brought some risk capital back into the market,” Sharma said.

China said over the weekend it plans to end the yuan’s 2-year peg to the US dollar and increase the flexibility of its exchange rate (OGJ Online, June 21, 2010). However, Olivier Jakob at Petromatrix, Zug, Switzerland, said the widening of the yuan produced only “a wide yawn” in energy markets. “We do not expect that the Chinese move on currencies will have any significant impact on oil demand, but it is quite telling that even the usual agitators did not manage to build up a good story on this Chinese input,” he said.

“The volatility index moved up and is about to test the resistance of 25%; the Standard & Poor’s 500 index moved down and is about to retest the support of the 200-day moving average. The run-up to the Group of 20 (G20) finance ministers and central bank governors meeting [scheduled June 26-27 in Toronto] will bring many contradictory headlines, and global markets will also wait for the Federal Open Market Committee’s [policy-making arm of the Federal Reserve Bank] comments that come with the interest rates decision tomorrow,” Jakob said.

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. reported natural gas could not sustain its recent $5/MMbtu price, “falling 2.5% even as forecasts called for hotter-than-normal weather over the next couple of weeks.”

In other news, US District Judge Martin Feldman in the Eastern District of Louisiana heard arguments June 21 from representatives of both Gulf Coast states and the oil industry to end the Department of the Interior’s 6-month drilling ban in US waters of 500 ft or more. Louisiana State Atty. Gen. Buddy Caldwell said the ban would result in 11,000 direct and indirect job losses along with the loss of $165-330 million/month in wages. Plaintiffs argued the drilling ban goes beyond previous disaster precedent in that air travel was only restricted 3 days after the Sept. 11, 2001, terrorist attacks on the US. They said the ban violates federal law requiring Interior to consult with affected states before reaching such a decision.

Raymond James analysts said, “The judge's ruling could be expected as early as today, but by no later than June 23 at noon. Bottom line: we expect that there is a slight chance that the courts could rule in favor of the plaintiffs, but if the moratorium is overturned, we could probably see a nice pop in all of impacted stocks (i.e., drillers, manufacturers, offshore construction).”

Jakob reported, “The tropical wave in the Caribbean Sea has a 50% probability for a tropical upgrade in the next 48 hr as it could enter an area of favorable upper-winds. Given its location and calculated path, this is a potential storm that will need to be closely monitored in the second half of the week.”

Energy prices
The July contract for benchmark US sweet, light crudes traded as high as $78.92/bbl June 21 on the New York Mercantile Exchange before closing at $77.82/bbl, up 64¢ for the day. The August contract advanced 35¢ to $78.61/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 64¢ to $77.82/bbl. Heating oil for July delivery increased 1.7¢ to $2.15/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month dipped by 0.48¢ to $2.14/gal.

Jakob noted, “Heating oil made further gains to trade at a premium to RBOB gasoline for August. The German consumers will have to replenish their tanks for next winter and if they are well below the bloated levels of 2009, they are above the 2005-08 average. There will be more heating oil demand than last year, but the level of incremental demand should not be enough to put the supply system at risk considering the amount of spare refining capacity still available in the system.”

The July natural gas contract dropped 12.4¢ to $4.87/MMbtu on NYMEX. “Prices had risen to $5.182/MMbtu in early trading before paring gains on the revised weather outlook,” Sharma said. “Natural gas production growth is expected to continue to be unabated in the near term as drilling activity remains strong. The US horizontal gas rig count currently stands at 612, which is only 1 less than the all-time high record reached in the week ending June 11. We expect oversupply concerns to weigh on the market when temperatures fall back to more normal levels next week.”

On the US spot market, gas at Henry Hub, La., gained 2.5¢ to $5.18/MMbtu.

In London, the August IPE contract for North Sea Brent crude was up 60¢ to $78.82/bbl. Gas oil for July gained $9 to $690/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 83¢ to $75.96/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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