MARKET WATCH: Energy prices continue climbing with weak dollar

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 1 -- Stronger prospects for the financial bailout of Greece pushed the euro to a 3-week high against the dollar, and the weaker dollar raised crude prices 2% on May 31 in the New York market.

“The broader market shook off weak economic data from the US to end the month on a positive note,” said analysts in the Houston office of Raymond James & Associates Inc. “Not to be outdone, natural gas rose 3% on forecasts for warmer temperatures.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “Oil finished strongly on the last day of May despite soft macroeconomic data from the US.” Oil products largely tracked gains in crude with reformulated blend stock (RBOB) falling slightly behind on the New York Mercantile Exchange. The term structure for West Texas Intermediate strengthened on news the Keystone Pipeline that carries Canadian crude to Cushing, Okla., will be shut down “for a few days” to repair a leak (OGJ Online, May 31, 2011).

“Net for May, front-month WTI and Brent lost $11.23/bbl and $9.16/bbl, respectively, after contracts hit their respective 2-year highs in April,” Zhang reported. “The drops in crude prices mostly took place during the first week of May. Since then, crude has been trading in a consolidation mode in the past 3 weeks. The recent Commodity Futures Trading Commission reports reveal some of the net speculative length has diminished after the record highs at the start of May. Oil market fundamentals continue to tighten up, which poses further upside risks to oil prices.”

He noted Japan’s weekly crude throughput dropped to 2.73 milion b/d last week, the lowest level in 5 years, while commercial crude inventories remained at seasonal highs. “With weak demand for crude from Japan, Dubai crude continues to trade at a heavy discount to Brent. This is likely to make the Organization of Petroleum Exporting Countries cautious about raising production, as incremental OPEC production is more likely to be of a similar quality to Dubai crude (heavy and of high sulfur content).”

Because of a weaker dollar, US economic data “failed to impress yet again,” with declining house prices and weaker-than-expected consumer confidence. Zhang said, “China’s office Manufacturing Purchasing Managers Index (PMI) for May was reported at 52, from 52.9 in April.

With the US and Chinese economies still showing signs of softening, oil market sentiment will likely suffer, “which might keep the oil market muted for longer than thought,” Zhang said. However, with the June 8 OPEC meeting and the crucial US nonfarm payrolls report scheduled for release June 3, “volatility could shoot up,” he said. “Still, some of the weakness in the economy was caused by supply disruptions following the earthquake in Japan, which could prompt a rebound. In addition, an increasingly tight oil market poses further upside risks to the oil price in the medium term.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Making a positive spin out of the macroeconomic data released yesterday should be a difficult exercise for anyone. First of all the Case-Schiller Index of house prices showed a double dip, breaking the 2009 lows and falling to the lowest level since 2002. Then there was the Chicago PMI that showed the largest monthly drop since October 2008 [to the] the lowest level since November 2009.”

On top of that, he said, “The conference board confidence index showed a decline and is at the lowest level of the year.”

Jakob said, “The European side of the Atlantic was not really better. French consumer spending in April dropped 1.8% and follows a 1% [decline] in March; the drop in April being mostly on the back of a fall of 10.2% in automobile sales. The only bright spot yesterday was the German retail sales number [up] 0.6%, but that is only a positive for those who choose to ignore that the expectations were [for an increase of] 1.8%.

In other news, Jakob noted, “Today is the first day of the official hurricane season” for the Atlantic and the Gulf of Mexico.

The weekly US oil inventory report will be released June 2 due to the Memorial Day holiday May 30.

Energy prices
The July contract for benchmark US light, sweet crudes traded at $99.60-103.39/bbl May 31 on NYMEX, before closing at $102.70/bbl, up $2.11 for the day. The August contract also increased by $2.11 to $103.27/bbl. On the US spot market, WTI at Cushing also was up $2.11, matching the front-month futures price of $102.70/bbl.

Heating oil for June delivery climbed 6.58¢ to $3.06/gal on NYMEX. RBOB for the same month increased 5.84¢ to $3.15/gal.

The July natural gas contract rose 14.8¢ to $4.67/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 21.1¢ to $4.63/MMbtu.

In London, the July IPE contract for North Sea Brent crude advanced $2.05 to $116.73/bbl. Gas oil for June jumped $19.25 to $962/tonne.

The average price for OPEC’s basket of 12 reference crudes was up $1.61 to $111.20/bbl. OPEC’s Vienna office will be closed June 2.

Contact Sam Fletcher at samf@ogjonline.com.

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