MARKET WATCH: Natural gas prices fall; crude oil continues rally

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 30 -- Natural gas prices continued to deflate with the front-month contract falling more than 4% on Aug. 27 in the New York market, but crude continued to climb for a third consecutive session, closing above $75/bbl.

“Natural gas was particularly hit as the [front-month] September contract expired under the prospects of milder weather and slowing industrial demand,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. The gas price was down 11% for the week “to the lowest level since Sept. 9 of last year after a slew of economic data signaled that industrial demand is slowing down,” he said.

With the September gas contract expiring “considerably below the coal-to-gas switching floor,” Sharma said, “We also expect demand from the utilities and independent power plants should be stronger in September, which would lend support to prices.”

Oil prices rallied after Federal Reserve Chairman Ben Bernanke said the Fed “will do all it can” to ensure a continuation of the economic recovery. The broader equity markets received Bernanke’s message “as a breath of fresh air after getting dogged for a few weeks by a barrage of bad economic news,” Sharma said. “Additionally, the second quarter gross domestic product growth, although bad at 1.6%, wasn’t as ugly as the economists’ expectations of a 1.4% [increase]. Despite the impressive price recovery on Friday, we expect crude to remain under pressure as crude and products inventory currently stand at 1.14 billion bbl, the highest level in at least 20 years, and the economic recovery remains largely tepid at this point,” he said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The West Texas Intermediate correlation to the volatility index (VIX) has been weakening but remains extremely high to the S&P [index]. This week will be particularly intense in terms of macroeconomic data, and that should make it hard to trade the flat price of crude oil according to oil fundamentals, especially in front of a long weekend that should see traders squaring some of the books and leaving…more room for the correlation machines to make the market.”

Jakob reported, “After being oversold to the correlations, WTI has now bounced back very close to the correlated value of the average of the S&P, VIX, and the euro.

The WTI 3-2-1 refinery margin for October gained $1/bbl during the week “and this for a second consecutive week,” he said. “The positive contribution to the 3-2-1 came both from the heating oil and the gasoline crack. The solver to the exceptional glut of petroleum product stocks in the US is refinery run cuts, and this is a scenario that is being priced-in through the intra-values with a strong widening of the contango on WTI and a narrowing of the contango in heating oil. These shifts in the time structure are then helping to support the prompt refinery margins and could therefore translate into some refineries still trying to push out a little more product for a little longer.”

Analysts in the Houston office of Raymond James & Associates Inc. noted, “Despite the Standard & Poor’s 500’s 1.7% rally on Friday, the index still posted its third straight weekly loss.” On a brighter note, they said energy stocks outperformed the broader market Aug. 27.

In other news, Tropical Storm Earl evolved into a major hurricane Aug. 29 and rapidly expanded to Category 3 strength Aug. 30 in the northeaster Caribbean. Earl’s apparent path is expected to take it up the East Coast, avoiding any contract with oil and gas production in the Gulf of Mexico.

Energy prices
The October contract for benchmark US light, sweet crudes climbed $1.81 to $75.17/bbl Aug. 27 on the New York Mercantile Exchange. The November contract escalated $1.99 to $76.21/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.81 to $75.17/bbl. Heating oil for September delivery increased 3.51¢ to $2.04/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 3.94¢ to $1.95/gal.

The September natural gas contract fell 16.6¢ to $3.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 11¢ to $3.70/MMbtu.

In London, the October IPE contract for North Sea Brent crude rose $1.63 to $76.65/bbl. Gas oil for September gained $4 to $643.50/tonne.

“WTI remains at a very steep discount to Brent and if the contango on Brent is much shallower than on WTI, in our opinion the fact that the US has to price to limit imports and maximize exports will start to weigh on the Brent spread as well,” Jakob reported. “The Middle East has exported some of its contango to the US, and we think that the US will now in turn export the contango to Europe. Freight rates remain very weak with an oversupply of [very large crude carriers (VLCCs)] looking for employment.”

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up 96¢ to $72.36/bbl. So far this year, OPEC’s basket price has averaged $75.35/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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