MARKET WATCH: Natural gas price escalates; crude oil price drops

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 18 -- The front-month natural gas futures price escalated almost 4% June 17 on the New York market with a smaller-than-expected ejection of gas into US underground storage and forecasts of hotter-than-normal weather. Crude oil, meanwhile, ended a 3-day rally on disappointing US economic data and continued concerns over weak fundamentals and European economic woes.

“Today could be a rough day for energy as oil, gas, and Dow Jones Industrial Average futures are all trading in the red this morning,” said analysts in the Houston office of Raymond James & Associates Inc.

The Energy Information Administration reported 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 (OGJ Online, June 17, 2010).

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “Taking account of hurricanes and [drilling] moratoriums, our normalized forecast for [gas] storage to reach 3.9 tcf at the start of winter could end being 3.7 tcf. This, along with rising coal prices and hot weather are supporting prices in our view and could continue to push prices higher into the summer.”

Initial claims for unemployment benefits in the US increased by 12,000 to 472,000 in the week ended June 12; economists expected a drop of 10,000 to 450,000. “The weak job report extended the decline in the broader market, and a report from the Philadelphia Federal Reserve, which showed that manufacturing in the region had slowed, put further downward pressure on [crude] prices,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “However, the US economy is expected to continue to expand in the second half of the year as the Conference Board’s index of leading US indicators climbed 0.4% in May.”

Sieminski said the combination of the drilling moratorium, tightened drilling regulations, and longer permitting time-frames could defer deepwater Gulf of Mexico oil production by nearly 50,000 b/d in 2010 and 200,000 b/d in 2011. “In addition, we believe it also raises the long-run equilibrium price of oil by as much as $5/bbl,” he said.

He reported, “This year gasoil demand has been recovering at a faster clip than other major fuels. While the low base of comparison serves as a partial explanation for gas oil's demand growth rates, we believe that underlying consumption is strengthening as the global economic recovery plays out.”

In other news, Valero Energy Corp. reported its 55,000 b/d fluid catalytic cracker at its McKee, Tex., refinery. “That should add pressure on the front West Texas Independent spreads if the shutdown of the FCC (expected until mid-July) forces some run cuts at the refinery (we would expect so) since it is largely fed by pipeline from Cushing, Okla., said Olivier Jakob at Petromatrix in Zug, Switzerland. “This would then result in loss of demand for Cushing-based crude oil at a time when stocks there are at record high and when the Department of Energy is showing record Canadian flows to the Midwest. Consequently, WTI has also moved back to a discount to Brent.”

In the continued drama of politics and oil, BP PLC Chief Executive Tony Hayward’s 7-hr televised appearance June 17 before the House Oversight subcommittee in Washington was described by Raymond James analysts as “a public performance so painful to watch that you just can't turn away.” It was “a classic example of political theater, complete with protestors demanding [Hayward’s] imprisonment and House members flashing pictures of pelicans covered in oil,” the analysts said. “Hayward shied away from speculation regarding the rig explosion's cause until investigations could be completed. This led to him being accused of ‘stonewalling’ by numerous members, though as he pointed out, he was not personally involved in the decision-making process on the rig.”

They said, “Hayward probably did about as well as anyone could under the circumstances, but whether the worst is over for BP's public relations nightmare remains to be seen.” On June 18, Moody's Investors Service downgraded BP's debt by three notches (following Fitch's six-notch downgrade earlier in the week), amid press reports about a $5-10 billion debt offering within days (OGJ Online, June 15, 2010).

Energy prices
The July contract for benchmark US light, sweet crudes dropped 88¢ to $76.79/bbl June 17 on the New York Mercantile Exchange. The August contract lost 68¢ to $78.04/bbl.

On the US spot market, WTI at Cushing was down 88¢ to $76.79/bbl. Heating oil for July delivery gained 3.73¢, however, to $2.15/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.88¢ to $2.16/gal.

The July contract for natural gas rebounded by 18.4¢ to $5.16/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., up 2.5¢ to $5.14/MMbtu.

In London, the new front-month August IPE contract for North Sea Brent increased 54¢ to $78.68/bbl. Gas oil for July jumped by $21.50 to $684.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained $1.09 to $75.24/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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