MARKET WATCH: Crude prices climb again

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 23 -- Energy prices made another 1-day turnaround, with the front-month crude contract climbing 1% May 20 in the volatile New York market after the Department of Homeland Security warned al-Qaeda is beginning to target US oil and gas infrastructure, although no specific or imminent threat was cited.

Earlier in that session, oil tumbled 2.5% when the German Bundesbank said growth in that country—Europe's largest economy—would slow, said analysts in the Houston office of Raymond James & Associates Inc. “US oil stocks remained resilient, with the oil service index remaining flat while the SIG Oil Exploration & Production Index (EPX) gained 1%. The broader market, however, fell 1%,” they said.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil registered small gains [May 20] despite a weaker euro.” June contracts for reformulated blend stock (RBOB) and heating oil contracts strengthened by 0.33% and 0.82%, respectively, leading to weaker cracks. “The term structures for West Texas Intermediate remained broadly unchanged, while North Sea Brent structure softened slightly,” said Zhang.

Olivier Jakob at Petromatrix, Zug, Switzerland, noted the front WTI 3-2-1 refinery margin (for July) lost $2.55/bbl last week while the 3-2-1 margin to Brent lost $2.10/bbl. “Most of the losses are coming from the RBOB crack that continues to slide down. In 10 trading days the July RBOB crack to Brent has lost almost $10/bbl. Gasoline is now cheaper than heating oil for the summer months, and that will push refiners to maximize the production of distillates. Going [this early] into maximum distillate mode should translate into the building of additional distillate stocks, which will then in turn cap the refinery margins at the exit of summer,” Jakob said.

He said, “The curve on RBOB gasoline has flattened significantly, and if the current trend continues, gasoline could soon start to compete with distillates for storage space. While we have been bearish [on] the gasoline crack in the early May run-up, we retain a more neutral view on it now that gasoline is priced below heating oil.”

Oil traded last week in a range-bound fashion “with plenty of intraday volatilities,” said Zhang. “During the week, most of economic data fell below market expectations, including Japan’s first quarter gross domestic product, US industrial production, and the US housing market. Some of the weakness in US industrial production can be attributed to supply disruption induced by the Japanese earthquake, particularly the auto manufacturing sector. Hence, the weakness is likely to be temporary and a quick recovery can be expected.”

The latest Commodity Futures Trading Commission report revealed money managers sharply cut their net length in crude by 13.1% to a level last seen prior to the Libyan civil war on both a futures and options combined basis. “Arguably, the reduction in the net-long position held by money managers and the recent decline in oil prices have effectively removed much of the ‘risk premium’ of the unrests in the Middle East and North Africa region,” Zhang said. “While the contagious risk to other major producers in the region has become subdued, Libyan supply remained largely shut in and unrest in Syria and Yemen is still heated. Commercial hedgers continued to reduce their net short positions, which have declined by 5% week-over-week. The decline is aligned with our expectation [for the] hedging flow to slow down. Swap dealers cut down their net short position by 10.5% week-over-week, which could be a profit-taking move from their record net short level reported 3 weeks ago.”

Energy prices
The expiring June contract for benchmark US light, sweet crudes gained $1.05 to $99.49/bbl May 20 on the New York Mercantile Exchange. The July contract climbed $1.17 to $100.10/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.05 to $99.49/bbl, still matching the front-month futures price.

Heating oil for June delivery increased 2.36¢ to $2.92/gal on NYMEX. RBOB for the same month inched up 0.98¢ to $2.94/gal.

The June contract for natural gas escalated 13.6¢ to $4.23/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 2.3¢ to $4.08/MMbtu.

In London, the July IPE contract for North Sea Brent was up 97¢ to $112.39/bbl. Gas oil for June dropped $8.50 to $909.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down 46¢ to $107.42/bbl. So far this year, OPEC’s basket price has averaged $106.06/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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