MARKET WATCH: Corporate earnings, Bonnie push up prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 23 -- Optimism over recent corporate earnings and concerns about approaching Tropical Storm Bonnie pushed up energy prices July 22 in the New York market, wiping out by large margins all losses from the previous session.

Natural gas prices closed 2% higher after the Energy Information Administration issued a neutral report of injection of 51 bcf of gas into US underground storage in the week ended July 16, compared with Wall Street’s consensus for a 52 bcf input, said analysts in the Houston office of Raymond James & Associates Inc. That raised working gas in storage above 2.89 tcf, down 52 bcf from a year ago but 261 bcf above the 5-year average (OGJ Online, July 22, 2010).

However, Raymond James analysts reported both gas and oil down slightly in early trading July 23.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Global markets had a strong reversal, with the Standard & Poor’s [index] making a sharp rebound, the dollar index making a sharp fall, and the volatility index plunging again below 25%. The correlations then supported crude oil, but the rally of yesterday was not just about the exogenous correlations as a weather premium was added” because of Tropical Storm Bonnie.

Jakob said, “In our correlation model we value West Texas Intermediate at $77.35/bbl, hence $2/bbl lower than the closing value of WTI [in the New York market] and we will therefore value the weather premium priced-in for Tropical Storm Bonnie at $2/bbl. It is impossible to be 100% certain of the potential of a tropical storm, and Bonnie is heading straight into the main area of crude oil production in the US Gulf of Mexico.”

Offshore operators on July 23 began bringing nonessential personnel ashore, “and given that the production companies will be more cautious than usual this year in the approach of any cloud, we have to assume that some crude production will be shut-in,” Jakob said. “However, the models are not calculating this storm to be a major one (the probabilities that it reaches Hurricane 1 status are only 12%). Therefore, if the intensity forecast is not increased during the day and if WTI continues to hold a premium for Bonnie, we will rather sell any rally on the close than stay long over the weekend.”

Earlier this year, Jakob noted, “Hurricane Alex brought a $2.35/bbl premium” in the last session of the week ahead of “weekend uncertainty.” But after that weekend, the price declined $6.80/bbl as Alex hit the Mexican east coast rather than Texas. “A total of 1.3 million bbl of crude production was lost on the shutdowns for Alex, and if we need to expect some shutdowns for Bonnie, it will take more than a tropical storm to cause structural damage to the oil assets in Louisiana,” he said. He sees “a risk of [price] correction at the start of next week if Bonnie does not evolve over the weekend in something bigger than a tropical storm.”

June market performance
“June was an up-and-down month for both the energy sector and the broader market,” said Raymond James analysts. “While oil prices found solid support at $70/bbl and trade range bound between $70/bbl and $80/bbl, the broader market yo-yoed up and then even further down as the Standard & Poor’s 500 [index] hit 6-month lows at the end of the month. Crude, nevertheless, outperformed the broader market and ended the month up 2.2%, while natural gas continued its rally to as high as $5.20[/MMbtu] before pulling back and ending the month up 6.3%.”

They said, “Gas was buoyed by the hottest June ever recorded and the latest EIA 914 data point, which showed stagnating production growth. Energy stocks were especially volatile and had healthy gains by midmonth before giving them back in the last 10 days of the month as the broader market tested new lows. The broader market ended June down 5.4% while exploration and production shares finished down 6.1% and the Oil Service Index (OSX) dropped 4.7%. This was after the OSX was pummeled for 19% the month before.”

Raymond James analysts observed, “Crude oil has recently rebound along with the broader markets. The September contract is now hovering in the mid-$70s after continuing to find support at $70/bbl. In the short-run, we remain cautious due to the bloated domestic inventory levels and the global economy. However, incremental supply projects continue to be delayed, which should constrict long-term supply (bullish long-term picture).”

As for natural gas, they said, “Weather has continued to be much warmer than usual, which is having a large impact on the week-to-week storage injections. The weather-intensity we have experienced since May has pushed storage into a year-over-year deficit.”

Aside from increased weather-related demand, Raymond James observed, “The market is beginning to trend looser when compared with last year, which has brought July prices back down to the $4.50/Mcf range. The market still appears to be looking ahead at an oversupplied summer, and we think the growing supply outweighs any recovering demand and will push prices lower.”

They added, “The broader [equity] market pulled back for the second consecutive month, falling over 5% during June. Energy stocks were down as well, although E&P and coal stocks were noticeably weaker. Energy stocks had fallen significantly since peaking in late April but have only recently started to retrace these losses. So far in July, the broader markets are up about 4%, E&P stocks are up 3%, and the OSX has rebounded a solid 7.5%.”

Energy prices
The September contract for benchmark US light, sweet crudes jumped by $2.74 to $79.30/bbl July 22 on the New York Mercantile Exchange. The October contract escalated $2.64 to $79.64/bbl. On the US spot market, WTI at Cushing, Okla., shot up $3.02 to $79.30/bbl as it realigned with the front-month futures contract. Heating oil for August delivery increased 7.32¢ to $2.06/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 7.88¢ to $2.15/gal.

The August natural gas contract jumped 13¢ to $4.64/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ but the closing price was essentially unchanged at a rounded $4.69/MMbtu.

In London, the September IPE contract for North Sea Brent crude was up $2.45 to $77.82/bbl. Gas oil for August gained $16.25 to $653.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 31¢ to $73.47/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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