MARKET WATCH: Oil prices continue climbing; gas price drops

Crude oil prices continued climbing July 27 with North Sea Brent widening its lead over West Texas Intermediate in markets still buoyant over the European Central Bank’s vow to support the euro.

However, analysts in the Houston office of Raymond James & Associates Inc. reported, “Natural gas fell 2%, barely staying above the $3/Mcf level, but is looking to bounce back this morning.” Crude was down in early trading July 30, they said.

“Supply concerns seem to be gaining the upper hand, which could spell further support for crude oil prices over the coming week. Nevertheless, should the Federal Open Market Committee [the policy-making arm of the Federal Reserve meeting this week] disappoint the market’s hopes [for a third phase of quantitative easing], we could see a sell-off,” said Walter de Wet at Standard New York Securities Inc., the Standard Bank Group. He expects WTI to average $90/bbl in the third quarter with Brent averaging $100/bbl.

The $4/bbl jump in Brent crude prices since July 25 was “largely a dollar play, as easing Euro-zone concerns and improved sentiment (as evident in positive global equity markets) have taken downward pressure off the euro,” De Wet said. “However, underlying economic growth remains weak as was highlighted once again by Japan’s industrial production data for June. Industrial production in the economy contracted 2% year-over-year (against expectations of a contraction of 0.1%).” While China’s manufacturing is expected to stabilize, European, Japanese, and US manufacturing is still struggling with weak domestic and global demand, he said.

Equity markets were up July 30 after US Sec. of the Treasury Timothy Geithner and the finance minister of Germany agreed on the need for international cooperation and coordination to resolve the Euro-zone debt crisis and faltering economic growth around the world at an informal meeting on the German North Sea island of Sylt. Geithner also is to meet with ECB Pres. Mario Draghi. Germany disagrees with some of ECB’s methods for dealing with the economic crisis.

Biofuel market

Raymond James analysts project expansion of biofuels will reduce US oil imports 6% from 2010 to 2020. “We are referring to next-generation (Gen2) biofuels; corn ethanol's current debacle amid record corn prices shows that it clearly won't be a future growth driver. Whereas there is inherent uncertainty in forecasts for the rig count and well productivity, Gen2 biofuel production—at least in theory—should be set in stone…because of the Renewable Fuels Standard (RFS), passed in 2007 and extending through 2022,” they said.

However, Raymond James analysts contend, “The RFS has become virtually irrelevant when it comes to providing visibility on scale-up of Gen2 biofuels, particularly cellulosic biofuels. Due to a combination of financing constraints and (to a lesser extent) technical hurdles, the industry is far behind on meeting its targets—and getting further behind by the year. The good news is that there are signs of progress as a wide variety of Gen2 biofuels approach commercialization and companies start to ‘graduate’ from the pre-revenue stage to commercial operations.”

Still, they said, “It is difficult to avoid the conclusion that the RFS has failed in stimulating the market forces required to bring online the envisioned Gen2 volumes over the next decade.”

Energy prices

The September contract for benchmark US light, sweet crudes rose 74¢ to $90.13/bbl July 27 on the New York Mercantile Exchange. The October contract advanced 75¢ to $90.42/bbl. On the US spot market, WTI at Cushing, Okla., also was up 74¢ to $90.13/bbl.

Heating oil for August delivery increased 2.1¢ to $2.89/gal on NYMEX. Reformulated stock for oxygenate blending for the same month climbed 7.4¢, also closing at a rounded $2.89/gal.

The August natural gas contract, however, fell 9.5¢ to $3.01/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 2.8¢ to $3.09/MMbtu.

In London, the September IPE contract for North Sea Brent gained $1.21 to $106.47/bbl. Gas oil for August was up $5.25 to $910.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes escalated $1.45 to $102.92/bbl. So far this year OPEC’s basket price has averaged $110.32/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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