MARKET WATCH: Oil prices keep climbing; natural gas future price rises

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 11 -- Oil prices continued climbing May 10 with the front-month crude contract up 1.3% in the New York market on fears Mississippi River flooding will further disrupt fuel supplies. The front-month natural gas contract also increased, ending a six-session losing streak.

“Natural gas rose 2.2% on forecasts for higher temperatures as air-conditioning units are expected to kick back on across the southern states,” said analysts in the Houston office of Raymond James & Associates Inc. “Strong earnings reports provided a modest boost to the broader market (Dow Jones Industrial Average up 0.6% and Standard & Poor's 500 Index up 0.8%). Energy stock got in on the action as well, with the Oil Service Index rising 1% and the SIG Oil Exploration & Production Index (EPX) up 0.7%.”

Natural gas was still on the rise in early trading May 11, but oil prices were down ahead of the Energy Information Administration’s weekly inventory report.

Continued recovery of oil prices is “supported by tightening market fundamentals,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. However, he said, “In contrast to a strong recovery in crude, gas oil cracks were hit hard May 10, reaching their lowest level since August 2010. We expect distillate cracks to come under more pressure due to a seasonal decline in demand and high inventories as crude prices regain momentum.”

Zhang said international fears over the Greek debt appeared to abate, lifting the euro and lending some support to the oil market.

In its monthly market report released May 11, the Organization of Petroleum Exporting Countries said the average price for its basket of 12 benchmark crudes rose to $118.09/bbl in April, up $8.25/bbl from March and $35.76/bbl from a year earlier. Members attributed that upward trend to civil unrest in the Middle East and North Africa and to “improving economic sentiment.” They noted the front-month contracts for West Texas Intermediate on the New York Mercantile Exchange and ICE Brent averaged $110.04/bbl and $123.10/bbl, respectively—their highest levels since the onset of the financial crisis.

“However, prices experienced extreme volatility and a sharp correction in the first week of May, dropping by almost $17/bbl, as profit-taking triggered a technical sell-off,” said OPEC officials. Since then, prices have rebounded, with the OPEC basket up $3.40 to $111.48/bbl on May 10.

Gasoline prices
The price of gasoline is “at similar levels” as in the summer of 2008, said Olivier Jakob at Petromatrix, Zug, Switzerland. Adjusting for the crack and the North Sea Brent-WTI spread, he said, “The price of WTI is for the US consumer at the equivalent 2008 level of $140/bbl. Today, WTI at $115/bbl (value of early last week) would compare to $152/bbl in 2008, and WTI at $147/bbl would compare to $184/bbl.”

Jakob also observed, “Last week after the [oil] price collapse, the US president asked his recently created task force against fraud in the oil market to report whether gasoline prices are falling in line with the big drop in oil prices, and if not, whether it is because of fraud or market manipulation.”

However, Jakob said, “The average US consumer will not see much of a difference at the pump and will not understand any explanation about cracks and Brent-WTI. He will see the US crude oil price reference (still WTI) $43/bbl below the peaks of 2008 and gasoline prices at the pump above the peaks of 2008. The average consumer will scream of fraud and market manipulation, and the US administration which has created a task force on the subject will be forced to come up with something or face a political backlash.”

He said, “The problem for US refiners is that they will have to explain to all sorts of task forces and other investigation committees why they are running at very low utilization rates when prices at the pump are at the 2008 peaks and why they have been running down their stocks of products by exporting diesel and gasoline over the last few months at record pace.” Jakob said, “With gasoline prices currently at 2008 peaks, the risk on demand erosion and destruction remains and the MasterCard [Spending Pulse] report on gasoline sales at the pump is showing demand down 2.4% vs. the same week a year ago and down 1.1% on the 4-week average.”

He warned, “If crude oil continues to go higher, with the current gasoline cracks we are heading into a wall of risk that includes demand erosion and destruction, [lower] revisions to US gross domestic product due to the impact on consumption, [and] increased political intervention. Bottom line: we think that a higher flat price level in crude oil with the current gasoline crack is going to be hard to sustain. Crude oil will need a lower gasoline crack if it wants to sustain prices back to the levels of early last week and even more so if it wants to target the 2008 peaks.”

In other news, Zhang said, “China’s industrial production, retail sales, and producer price index for April all came slightly below market consensus, which suggests that the tightening monetary policy has shown some effect without causing major damage. The Consumer Price Index for April still came in at 5.3% year-over-year vs. the 4% target. Consequently, we would foresee further tightening in the next few months.”

US inventories
EIA said May 11 commercial US crude inventories gained 3.8 million bbl to 370.3 million bbl in the week ended May 6, more than double the Wall Street consensus for a 1.5 million bbl increase. Crude supplies are above average for this time of year. Gasoline stocks increased 1.3 million bbl to 205.8 million bbl last week, while the market was expecting an 800,000 bbl decrease. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories dropped 800,000 bbl to 144.3 million bbl vs. traders’ expectations it would remain flat, said EIA.

The American Petroleum Institute earlier reported benchmark crude stocks rose 2.95 million bbl to 367.2 million bbl last week. It said gasoline inventories fell 1.8 million bbl to 209.5 million bbl, while distillate fuel stocks gained 582,000 bbl to 147.5 million bbl.

EIA said imports of crude into the US increased 87,000 b/d to just under 9 million b/d last week. In the 4 weeks through May 6, crude imports averaged nearly 8.8 million b/d, down 943,000 b/d from the comparable period last year. Total gasoline imports averaged 1.2 million b/d, while distillate fuel imports averaged 166,000 b/d.

The input of crude into US refineries averaged 14.1 million b/d last week, an increase of 49,000 b/d with units operating at 81.7% of capacity, EIA reported. Gasoline production increased to 8.9 million b/d while distillate fuel production decreased slightly to 4.2 million b/d.

Jacques Rousseau, managing director of equity research, RBC Capital Markets, Reston, Va., said, “Demand for gasoline, distillate, and jet fuel fell 2.7% in total vs. the prior week and was 3.9% below year-ago levels. Ordinarily, this reduced demand level would have resulted in rising inventories of refined products. However, supply remains low due to production issues and should stay below normal levels in the coming weeks due to reduced output related to high water levels and flooding from the Mississippi River.”

Rousseau said, “We expect Midwest refining margins to remain strong due to the glut of crude oil in the region. This should benefit refiners with the ability to process Canadian, WTI, or WTI-price-linked crude oil. In the near term, although the spring refinery maintenance season peaked in February, a high level of unplanned downtime has kept refinery utilization rates low and reduced inventory levels of gasoline and distillate, a positive for refining margins and stocks.”

Rousseau reported, “The average US refinery utilization rate decreased to 81.7% from 82.8%, and production of light products (gasoline plus distillate plus jet fuel) fell 0.5%.” He added, “Over the past 4 weeks, total product demand is 0.5% below year-ago levels, according to the EIA vs. up 1.4% [from the previous] week.”

He said, “Gasoline inventories are 1% below their 5-year average for this calendar week while distillate stocks are 13% above their 5-year mean.” Midwest crude oil inventories were unchanged at 106 million bbl, but Cushing, Okla., crude inventories increased 1.1 million bbl from the previous week.

Rousseau estimated the average US refining margin increased from $23.61/bbl to $26.14/bbl over the past week vs. an average $9/bbl in 2009 and $10/bbl in 2010.

Energy prices
The June contract for benchmark US light, sweet crudes increased $1.33 to $103.88/bbl May 10 on NYMEX. The July contract rose $1.37 to $104.47/bbl. On the US spot market, WTI at Cushing was up $1.33 to $103.88/bbl, in conjunction with the front-month crude futures contract.

Heating oil for June delivery increased 3.94¢ to $3/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month jumped 10.13¢ to $3.38/gal.

The June natural gas contract advanced 9.3¢ to $4.25/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., declined 5.5¢ to $4.18/MMbtu.

In London, the June IPE contract for North Sea Brent crude climbed $1.73 to $117.63/bbl. Gas oil for May escalated by $21.50 to $941.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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