MARKET WATCH: Oil prices bounce back on stronger economy indicators

Front-month benchmark crude prices jumped 3% in both the US and UK futures market May 2, wiping out losses from the previous session, after the European Central Bank cut its benchmark interest rate to a record low of 0.5% from 0.75%.

Following a meeting in Bratislava, Slovakia, ECB officials promised to provide as much cheap cash as banks need through 2014. They also said they’re looking at ways to stimulate lending to small businesses.

“The ECB cut interest rates for the first time in 10 months to an all-time low in an attempt to shore up a languishing economy,” said analysts in the Houston office of Raymond James & Associates Inc. “That may be too aggressive, but the Federal Reserve Bank tapering the pace of its bond-purchase program by the end of this year now certainly seems a less likely outcome than it did just a few months ago. Against this backdrop and positive labor market data (weekly jobless claims at 5-year low), the Standard & Poor’s 500 Index and the Dow Jones Industrial Average both gained 1%, erasing all of the previous day's losses.” The SIG Oil Exploration & Production Index and the Oil Service Index each regained 1.5%.

Gas markets down

The front-month natural gas contract plunged 7% “on a mega-bearish weekly injection report, which came in a surprising 2 bcfd looser than consensus estimates,” said Raymond James analysts.

The Energy Information Administration reported the injection of 43 bcf of natural gas into US underground storage in the week ended Apr. 26, far above Wall Street’s consensus for an addition of 29 bcf. That raised working gas in storage to 1.777 tcf, which is 795 bcf below the year-ago level and 118 bcf below the 5-year average (OGJ Online, May 2, 2013).

Raymond James analysts said, “This implied that the market was 4.6 bcfd looser vs. last year, and we have been averaging 2 bcfd looser over the past 4 weeks. Without a doubt the market has started to loosen up on the back of gas-to-coal switching; however we believe the [earlier] rise up to $4.40/MMbtu level was a little premature.”

At the beginning of the week, the natural gas curve was in backwardation with the December 2013 contract at $4.69/MMbtu and contracts for the same month in 2014 and 2015 at $4.56/MMbtu and $4.54/MMbtu, respectively. “However with yesterday's market correction, the market is back to a slight contango,” said Raymond James analysts. “The backwardation was most likely attributable to producers layering on more hedges and irrational exuberance along the front of the curve. Going forward, we remain steadfast that gas prices must remain range bound at the $4 level but believe that increased supply growth starting in the second half of this year will continue to keep gas prices near these levels for 2014.”

Energy prices

The June and July contracts for benchmark US light, sweet crudes each climbed $2.96 May 2 to $93.99/bbl and $94.20/bbl, respectively, on the New York Mercantile Exchange. On the US spot market, West Texas Intermediate at Cushing, Okla., also was up $2.96 to $93.99/bbl.

Heating oil for June delivery rose 6.66¢ to $2.86/gal on NYMEX. Reformulated stock for oxygenate blending for the same month increased 6.13¢ to $2.78/gal.

However, the June natural gas contract continued falling, down 30.1¢ to $4.03/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 9.6¢ to $4.23/MMbtu.

In London, the June IPE contract for North Sea Brent gained $2.90 to $102.85/bbl. Gas oil for May recovered $12 to $834.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $1 to $98.97/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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