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MARKET WATCH: Oil prices inch up; gas price retreats

Oil prices inched up following some positive economic indicators May 24 with the front-month crude contract climbing back above $90/bbl in the New York market. But energy prices remain near the lowest levels for this year.

“The broader market saw a late rally after Italy's prime minister said he expected Greece to stay in the Euro-zone, and the market eked out modest gains,” said analysts in the Houston office of Raymond James & Associates Inc. “In the US, initial jobless claims fell for the first time in 3 weeks, restoring some confidence in the US labor market. Crude gained a percentage point on the day to stem the recent sell-off. Natural gas fell 3% on forecasts for milder weather, following a neutral inventory report.” Cueing to the price drop in the gas futures market, the SIG Oil Exploration & Production Index and the Oil Service Index were down 2% and 1%, respectively.

Despite optimistic statements, the composite Euro-zone Purchasing Manager Index (PMI) fell from 46.7 in April to 45.9 in May. “Even Germany fell below 50 (at 49.6),” said Olivier Jakob at Petromatrix in Zug, Switzerland. “The issue of the Greek exit from the Euro-zone continues to make a lot of noise, and globally (i.e. not only in Europe but also in Asia) manufacturers that have learned a lesson from the credit crunch of 2008 might be lowering inventories and keeping as much cash as possible until they can be sure that Greece will not morph into another credit crunch.”

Although markets recently have focused on the financial troubles of Greece and other members of the Euro-zone, the world’s two biggest economies—the US and China—are seen to be slowing. Hongkong & Shanghai Banking Corp. Ltd.’s latest PMI survey for China showed continued contraction.

Hurricanes and supply

Jakob said, “The tropical storm season is starting early this year. We already had Alberto, the first tropical storm of the season, and there is another one brewing on the east coast of Florida. Last year was a very active tropical season but with most storms in the Northern Atlantic rather than the Gulf of Mexico; it is interesting to see that this year is also starting with relative high activity in the Northern Atlantic.”

He said, “One thing that we can be sure is that the US government this year will not hesitate 1 sec in calling for a Strategic Petroleum Reserve release if there are any storms hitting the US gulf. It is also interesting to note that even the Republicans are starting to support the release of the SPR in case of supply disruptions due to the sanctions against Iran. We are starting to think that policy-makers are waiting for the official start of the European sanctions on July 1 to trigger the SPR bullet, as legally it would become a formal event only on that date.”

For the moment, the reversal of the Seaway Pipeline to transport crude from the Midwest to the Gulf Coast is influencing the spread between Light Louisiana Sweet crude (LLS) and West Texas Intermediate, “making LLS fall to extreme discounts to Brent,” Jakob said. “This should heavily reduce the flows of West African crude oil to the US Gulf Coast as [it] simply doesn’t need those barrels anymore since they are being replaced with Bakken and Eagle Ford crude. This in turn will likely push more West African crude oil to northwest Europe. This can be seen in values for light crude oil in the Mediterranean plunging to very low differentials. Brent, however, has become a South Korean island and is therefore for now still disconnected [from] the realities of the Atlantic Basin crude oil dynamics,” he said.

Jakob said, “The strong decline in oil prices will not do much for the European consumer, because the increase of the dollar index is to a large part offsetting the lower oil prices in dollars. The Euro-zone consumers [may need] lower pump prices, but they are not really getting them for now. The recent price correction should not translate into a European oil demand revival.”

Energy prices

The July contract for benchmark US light, sweet crudes rose 76¢ to $90.66/bbl May 24 on the New York Mercantile Exchange. The August contract gained 74¢ to $90.94/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.07 to $90.66/bbl, back in step with the front-month futures contract’s closing.

Heating oil for June delivery increased 0.98¢ to $2.82/gal on NYMEX. Reformulated stock for oxygenate blending for the same month inched up 0.42¢ to $2.88/gal.

The June natural gas contract dropped 9¢ to $2.65/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 4.9¢, also closing at a rounded $2.65/MMbtu.

In London, the July IPE contract for North Sea Brent advanced 99¢ to $106.55/bbl. Gas oil for June increased $2.25 to $905.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 67¢ to $103.49/bbl.

Contact Sam Fletcher at samf@ogjonline.com.


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