MARKET WATCH: Oil prices strengthen; natural gas falls 3%

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 17 -- Oil prices recovered slightly on June 16 from generally precipitous declines in the previous session, but natural gas dropped 3% in the New York market on forecasts of milder weather.

The Energy Information Administration reported the injection of 69 bcf of gas in to US underground storage in the week ended June 10, below the Wall Street consensus for a 71 bcf input. That brought working gas in storage to roughly 2.3 tcf. That’s 275 bcf less than in the comparable period last year and 76 bcf below the 5-year average (OGJ Online, June 16, 2011).

That addition still was “too high to outweigh mild weather forecasts,” said analysts in the Houston office of Raymond James & Associates Inc. The price of crude remained “relatively flat” as markets balanced the International Energy Agency’s modest increase in its forecast of world oil demand against a stronger dollar,” they said.

Elsewhere, the export of Libyan gas to Italy was cut off in February and likely will remain so “at least” through the rest of this year “and quite possibly further,” said Adam Sieminski, energy strategist, Deutsche Bank AG, Washington, DC. “Consequently, we expect that the Italian share of deferred Russian gas will be entirely consumed this year.”

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “So far this month we saw a series of negative and worse-than-expected data, especially out of the US. As far as commodities are concerned, we believe global macro economic data [are] revealing two trends—manufacturing is slowing and final product inventory is building. At the same time final demand is either slowing or weak. A build in product inventory and slowing final demand is not a positive signal.”

Oil demand, supply
In its most recent report, the IEA’s outlook for oil demand growth this year was unchanged at 1.3 million b/d. “But the call on crude from the Organization of Petroleum Exporting Countries increased by 400,000 b/d to 30.1 million b/d. Half of the increase…is coming from downward revision to non-OPEC supplies (Europe and Latin America) and half from a downward revision to processing gains,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

“Normally a revision upwards of the call on OPEC would be a bullish input,” he said. “The problem, however, is that the IEA also found some additional OPEC crude oil and has made strong upward revisions to its baseline OPEC production.” The additional production apparently was in Venezuela, with the IEA revising its output up by 423,000 b/d in 2008; 513,000 b/d in 2009; 289,000 b/d in 2010; and 300,000 b/d in the first quarter of this year.

“In its comments the IEA points out that it is playing it on the safe side (i.e. that Venezuelan production could even be higher),” Jakob said.

He noted, “The call on OPEC for 2011 is now at 30.1 million b/d, with 30.7 million b/d in the third quarter and 30.1 million b/d in the fourth. If Saudi Arabia pumps at 10 million b/d, then we would have OPEC production at 30.5 million b/d and basically an unchanged overall stock situation for the second part of the year.”

For 2012, the IEA sees oil demand rising by 1.3 million b/d (same volumetric growth as in 2011); non-OPEC supplies increasing 900,000 b/d (compared with a 600,000 b/d increase in 2011); and OPEC’s NGL up 400,000 b/d (compared with a 600,000 b/d increase in 2011). “The IEA sees the call on OPEC crude oil in 2012 at the same level as in 2011 (30.1 million b/d),” Jakob said. “Hence the world could live on a volumetric basis without Libya in 2012 while on the other hand there will be increased flows from Iraq and the new offshore fields in Angola (220,000 b/d from the Pazflor field starting in October and 150,000 b/d from the PSVM [Plutao, Saturno, Venus, and Marte fields] in Block 31…in 2012).” He acknowledged, however, “The sweet-sour mix would remain an issue if Libyan crude oil was not to come back.”

As for spare capacity, the IEA estimates OPEC’s sustainable crude production capacity will be 37.9 million b/d in 2016, well above the call on OPEC,” said Jakob.

Sieminski at Deutsche Bank reported, “We show indicative Chinese refining margins down 56% year-to-date. Sharply lower runs may be ahead given what appears to be heavy maintenance for this month and next, which will factor into apparent demand calculations.”

He mentioned a new IEA study that concludes “unless the natural gas revolution in the US spreads globally, it will be virtually impossible to achieve carbon and greenhouse gas reduction goals.”

In other news, the Philadelphia Federal Reserve Bank “printed a negative 7.7 vs. expectations of plus 7, the lowest number since July 2009 and the largest 3-month fall on record,” Jakob reported.

Sieminski observed, “Break-even oil prices to balance budgets in key oil-exporting countries range from $82/bbl in Saudi Arabia to $96/bbl in Russia and $103/bbl in Nigeria. We believe this lends support to crude prices alongside rising finding and development costs.”

Energy prices
The July contract for benchmark US light, sweet crudes advanced 14¢ to $94.95/bbl June 16 on the New York Mercantile Exchange. The August contract increased 10¢ to $95.36/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., kept in step with the front-month futures contract, up 14¢ to $94.95/bbl.

Heating oil for July delivery inched up 1.9¢ to $3/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 2.59¢ to $2.95/gal.

The July natural gas contract continued to tumble, down 16.5¢ to $4.41/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 1.6¢ to $4.54/MMbtu.

In London, the new front-month August IPE contract for North Sea Brent crude regained $1.01 to $114.02/bbl after losing more than $6/bbl in the previous session. Gas oil for July greatly accelerated its decline, falling $29.75 to $948.75/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped $3.07 to $109.55/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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