MARKET WATCH: Smaller storage injection raises natural gas futures price

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 3 -- The front-month natural gas contract escalated nearly 3% June 2 to its highest level since January in the New York market following a “much” smaller-than-expected injection into US underground storage.

“Crude, on the other hand, posted a bearish build in inventories but managed to end the day flat on a weaker dollar following Moody's Investors Service Inc.’s US default watch and progress restructuring Greek debt,” said analysts in the Houston office of Raymond James & Associates Inc.

Officials at Moody’s said June 2 the US government’s credit rating will be cut if there's no imminent progress on the debt-ceiling fight. In late April, Standard & Poor's Ratings Service for the first time downgraded its the long-term outlook on US government debt to “negative” from “stable,” citing a one-in-three chance the US could lose its top investment rating on its debt in the next 2 years due to the government’s inability to bring the massive federal budget deficits under control.

Energy stocks followed gas upwards “despite downward pressure from the broader markets,” Raymond James analysts said.

US inventories
The Energy Information Administration said reported the injection of 83 bcf of natural gas into US storage in the week ended May 27. That put working gas in storage at 2.1 tcf, down 237 bcf from the same period a year ago and 42 bcf below the 5-year average

EIA also reported commercial inventories of US crude increased 2.9 million bbl to 373.8 million bbl during that same week; the Wall Street consensus was for a decline of 1.6 million bbl. Gasoline stocks rose 2.6 million bbl to 212.3 million bbl in the same period, exceeding expectations for a 900,000 bbl gain. Finished gasoline inventories decreased while blending components stocks increased. Distillate fuel stocks dropped 1 million bbl to 140.1 million bbl, exceeding analysts’ anticipation of a 300,000 bbl decrease.

“Oil recovered from an intraday sell-off following the weekly inventory report, ending the day slightly higher,” said analysts at Standard New York Securities Inc., the Standard Bank Group. Reformulated blend stock (RBOB) was again a laggard in the oil complex, as EIA reported another week of sizable gains in gasoline inventory.

“Heating oil outperformed on the back of a counter-seasonal distillate inventory draw in the US. The term structure of West Texas Intermediate continues to weaken, however, despite the draw in Cushing, Okla., inventories…and the recent disruption to the Keystone Pipeline,” they said.

Moreover, US weekly jobless claims came in “below market expectations and well above the 400,000 mark, while April factory orders fell by 1.2% month over month,” said Standard Bank Group analysts. “The two sets of data further depressed oil market sentiment.”

They said, “For now, weak economic data appear to have taken over direction for the oil market, from concerns over supply disruptions.” They added, “While concerns over supply tightness in the oil market warrants a bullish bias in the medium term, we could see a further downside correction in oil prices in the near term until the global economy overcomes its current soft patch.”

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Gasoline stock levels are within the range for the season and are not a supply concern given the poor level of gasoline sales reported by [the latest MasterCard Spending Pulse report on retail gasoline sales at the pump]. There are as always some refinery hiccups left and right, but gasoline imports at 1.1 million b/d on the 4-week average are on the high side.”

He noted, “Stocks of distillates on the other hand continued to move lower but are only low when compared to the extreme levels of 2010 and 2009. We are only starting the driving season, but gasoline is again trading below heating oil. The gasoline crack has lost more than $10/bbl since the peaks of early May, and the current relative values should favor the optimization of distillate production.”

Jakob said, “Refinery utilization rates have started to come up, but with gasoline trading below heating oil the processing margins are not particularly attractive.”

Overall, he said, “US demand remains weak. There are no clear concerns on gasoline supply shortages, and gasoline values are being pushed below heating oil. US crude oil stocks are building and are plentiful. The US weekly statistics are not supportive, and they did pressure oil prices down yesterday. However, reports of an agreement for a new bail-out of Greece supported the euro and that then triggered some buying in crude oil.”

Crude oil prices have difficulty in breaking from a narrow price range because fundamentals are not strong enough to attract convinced buying, “but on the other hand the computers are keeping crude supported on each rebound in the euro. This being said the large financial players are not necessarily enjoying the current market conditions given that oil lacks a clear direction while the space is very crowded,” Jakob said.

If the Organization of Petroleum Exporting Countries raises production at its June 8 meeting, Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “The near-term interpretation of that outcome could be modestly bearish, turning bullish later this year as the global economy picks up again.”

He noted, “More than 2 months have passed since the disaster in Japan. Recent data show fuel oil demand is rising, likely due to oil-fired power use. As we expected, Japan's gas oil exports were sharply lower. In our view, gas oil exports are unlikely to normalize near term given ongoing refining outages, which may prove to be supportive for the regional market.”

In other news, ConocoPhillips said its 238,000 b/d Bayway refinery in Linden, NJ, is operating at reduced rates after a furnace fire in its crude unit on June 1. Royal Dutch Shell PLC restored power and steam supplies to its 210,000-b/d refinery in Deer Park, Tex., and units are returning to normal operations, an official said.

Energy prices
The July contract for benchmark US light, sweet crudes increased 11¢ to $100.40/bbl June 2 on the New York Mercantile Exchange. The August contract gained 14¢ to $101/bbl. On the US spot market, WTI at Cushing was up 11¢ to $100.40/bbl.

Heating oil for July delivery advanced 3.52¢ to $3.04/gal on NYMEX. RBOB for the same month dipped 0.96¢ to $2.97/gal.

The July natural gas contract escalated by 16.5¢ to $4.79/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 8¢ to $4.71/MMbtu.

In London, the July IPE contract for North Sea Brent crude gained $1.01 to $115.54/bbl. Gas oil for June dropped $15.25 to $944/tonne.

The average price for OPEC’s basket of 12 reference crudes declined $1.53 to $109.91/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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