MARKET WATCH: Energy prices slipped lower ahead of holiday weekend

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 5 -- Energy prices slipped lower July 1 ahead of the 3-day US Independence holiday weekend, with crude posting slight losses due to slower growth in China and natural gas down more than 1% in the New York market on forecasts of milder weather for the rest of this summer.

“The broader markets gained over 1%, wrapping up a strong week as resolutions for the Greek debt crisis gave investors confidence,” said analysts in the Houston office of Raymond James & Associates Inc. However, energy stocks trailed the broader markets. Oil and gas prices were reported up in early trading July 5.

At the start of this year, Raymond James cut its 2011 natural gas price forecast to $3.75/Mcf from $4.25/Mcf because of “huge supply growth.” However, the analysts said, “While the supply growth was even higher (or more bearish) than we thought, it couldn't make up for an exceptionally frigid winter in the US and Canada, which effectively ate 500 bcf of storage in North America. Because of this, we are unlikely to fill US gas storage in 2011 (3.75 tcf), and are taking our 2011 natural gas estimate back up to $4.25/Mcf.”

Unfortunately, Raymond James analysts said, “The outlook for 2012 is not any better. We think continued gas supply growth will dwarf any increases in demand. Specifically, extreme weather comps should reduce year-over-year gas demand by nearly 2 bcfd (including Canada) if 2012 sees a return to normal weather. For now, we are conservatively maintaining our $4.25/Mcf price deck for 2012 even though our gas model says we will be 350 bcf oversupplied in 2012. In other words, we see more downside than upside to our 2012 estimate. Most importantly, [Wall] Street again appears to be overestimating the potential for natural gas, averaging over $1/Mcf above our 2012 estimate, which itself is likely too high.”

SPR release ‘oversubscribed’
The US Department of Energy said July 1 its proposed release of 30 million bbl crude from the Strategic Petroleum Reserve was oversubscribed, with 28 “apparently successful” bids for a total of 30.64 million bbl. Prices offered in the apparently successful bids were $104.98-108.88/bbl, with an average price of $106.91/bbl.

DOE earlier said it could refuse bids more than 5% below its base reserve price of $112.78/bbl. However one analyst told OGJ Online, “Close to half of the accepted bids were below that level,” signaling the government’s determination to get that oil to market.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “We continue to expect that this will weigh against the Brent premium to West Texas Intermediate (through pressure on the Light Louisiana Sweet premium to WTI).”

Meanwhile, Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, said, “We are adjusting some of our oil price forecasts. In the case of benchmark global crude oil prices, our average annual price forecast for Brent in 2011 is unchanged at $112/bbl, while our 2012 Brent forecast is increased by $10 to $115/bbl. The increase in expectations is due to a forecast further reduction in global spare capacity in 2012, together with a significant intensification of the geopolitical background to the oil market.”

Horsnell observed, “WTI prices remain severely dislocated, and our price forecasts are being adjusted to reflect a longer period of WTI decoupling from not only Brent but also from other US oil benchmarks. Our forecast for WTI in 2011 is reduced by $6 to $100/bbl, while our 2012 WTI forecast is increased by $4 to $110/bbl.”

He reported, “Our detailed 2012 supply and demand forecasts show a continuation of robust emerging market demand. Global oil demand is expected to grow by 1.38 million b/d, with non-OECD demand rising by 1.57 million b/d. The main sources of demand growth in 2012 are expected to be China, India, Saudi Arabia, and Brazil. Non-OPEC growth is expected to rise by 420,000 b/d. Output growth is heavily concentrated in North and South America, and indeed outside the Americas non-OPEC output is set to fall in 2012.”

Last week marked the end of the Federal Reserve Bank's second quantitative easing (QE2) program, and Jakob pointed out, “US stock indices had a spectacular rebound after 8 weeks of continuous erosion. The weekly gains in the Standard & Poor’s 500 index points were the highest since the second week of March 2009, the week that marked the end of the stock collapse from the 2008 crisis. The S&P 500 gained 5.61% during the week and is now [up] 6.52% for the year, while the NASDAQ was up by 6.15% during the week and is also 6.15% for the year. The NASDAQ is now rebounding towards another test of the 2007 peaks.”

Energy was the best performing sector in the S&P 500 during the week, “which is a bit surprising given that oil prices are currently under some capping pressure,” said Jakob. “A few banks have been ranting about the interventionist policies of the International Energy Agency [that approved the release of crude and petroleum products from members’ strategic reserves]. However, we think that in the end the financial sector might be the largest beneficiary of the IEA-SPR move. If investors start to believe that the oil trade is now capped by regulators due to the IEA’s new action philosophy, then we might start to see some rotation from the energy sector to the other sectors,” he said.

In other news, ExxonMobil Corp. is working to clean up a crude spill estimated at 750-1,000/bbl from its 12-in. Silvertip pipeline into the Yellowstone River in Montana (OGJ Online, July 5, 2011). The spill occurred July 1 and is reported to affect at least a 10-mile stretch of the river, though assessments are ongoing. The environmental impact appears modest, with no danger to public health in terms of air quality and no reports of impact on municipal water systems.

Raymond James analysts advised, “Exxon investors should brace themselves for a few days (perhaps weeks) of adverse headlines, but we do not see this event as a material financial risk.”

Energy prices
The August contract for benchmark US light, sweet crudes dropped 48¢ to $94.94/bbl July 1 on the New York Mercantile Exchange. The September contract was down 45¢ to $95.51/bbl.

Heating oil for August delivery declined 2.18¢ to $2.92/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.34¢ to $2.97/gal.

The August natural gas contract lost 6.3¢ to $4.31/MMbtu on NYMEX. Price reports on cash markets and the London futures market were not available at presstime.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained 42¢ to $106.92/bbl on July 4. So far this year, OPEC’s benchmark basket has averaged $106.72/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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