A general price rally for crude and petroleum products gained strength June 27 with crude up 1.6% in the New York futures market, but the front-month natural gas contract fell 3.4% after the Energy Information Administration reported a bearish injection last week.
Oil prices were up in early trading June 28 during the last market session for the first half of this year. Trading often is volatile when a month, a quarter, and a half-year all end in the same session. But markets appeared relatively calm compared with volatile activity in recent weeks.
“Now that the unfounded demand optimism that began the year has been priced out . . . the outlook for global crude oil demand appears modestly supportive of prices,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. “The resilience of the US consumer in the face of the country’s various fiscal hurdles bodes well, although we would warn against extrapolating the recent and abrupt pick-up in some economic indicators.” He expects West Texas Intermediate to average $96/bbl in the third quarter, with North Sea Brent averaging $105/bbl.
Analysts with Barclays Capital Commodities Research said, “The demand side of the equation for crude oil markets does face some speed bumps in terms of tightening balances in our view, which could slow the process of price retracement in the second half of the year. Natural gas prices continued to edge lower this week, with the August contract falling 4.6% [from the previous week] and dropping below $3.75/MMbtu despite a warmer forecast for the near term.”
Chinese demand for crude should hold steady, but “further slowing of China’s economy is a non-negligible risk to our current prediction,” Ground reported. “Renewed sovereign debt problems in the Euro-zone economy also pose another downside risk, although our baseline sees a modest improvement in the region’s economic activity.”
On the supply side, the Organization of Petroleum Exporting Countries seems comfortable with current prices as ministers voted at their last meeting to hold the official production ceiling at 30 million b/d—“leaving the oligopoly as a relatively neutral factor for now,” Ground said. “Ample OPEC spare capacity as well as generous global inventory levels (particularly in the US) should also prevent prices from running away should the global growth outlook improve more significantly than we predict. Some support for prices on the supply side over the coming quarter could be a tighter North Sea market due to heightened maintenance over the summer, and, in our view, slower US production growth in the face of likely disruptions.” The US climatological center predicts a more intense hurricane season this year.
Geopolitical threats to supply also remain ever present. However, Ground said, “Unless there is a significant increase in the likelihood that other oil-producing countries in the region will be drawn into the Syrian conflict, [price] rallies on news-flow surrounding this issue should fade. If anything, the geopolitical premium might ease, given that Iran’s new president appears more moderate, opening the way to perhaps a more conciliatory approach in negotiations surrounding the country’s nuclear program and the possibility of a lifting of sanctions.” But uncertainty remains prior to the president-elect taking office Aug. 3.
“The run-up to and then the Federal Reserve Bank’s actual tapering of quantitative easing, most likely to begin in September, should keep upward pressure on the dollar,” Ground predicted. “This we believe will keep upside in oil prices, premised on an improving demand story, contained. In fact, we view the dollar’s reaction (and the related reaction in interest rates) to a paring in Fed bond purchases as a major downside risk to our price forecasts. A trimming of quantitative easing might also dampen the enthusiasm of the speculative market, although we feel that investor interest could be maintained if tapering is accompanied by an improving crude oil demand outlook.”
In other news, Barclays Capital analysts reported, “Discounts on Canadian crude oil have narrowed significantly since the start of the year. The heavy West Canadian Select grade (ex-Hardisty) was trading at a deep discount of $42.5/bbl to WTI in December, narrowing to current levels of around $16/bbl.”
The equity market rallied June 27 “for the third day in a row as investors became more comfortable with the Fed's complicated message,” said analysts in the Houston office of Raymond James & Associates Inc. The Standard & Poor’s 500 Index closed 0.6% higher while the Dow Jones Industrial Average gained 0.8%. The Oil Service Index advanced 0.5%, but the SIG Oil Exploration & Production Index dropped 0.7%.
The August contract for benchmark US light, sweet crudes climbed $1.55 to $97.05/bbl June 27 on the New York Mercantile Exchange. The September contract rose $1.48 to $96.89/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.55 to $97.05/bbl.
Heating oil for July delivery rebound by 3.51¢ to $2.89/gal on NYMEX. Reformulated stock for oxygenate blending for the same month took back 1.2¢ to $2.74/gal.
The new front-month August natural gas contract fell 15.5¢ to $3.58/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.9¢ to $3.74/MMbtu.
In London, the August IPE contract for North Sea Brent gained $1.16 to $102.82/bbl. Gas oil for July escalated $19 to $882.75/tonne.
The average price for OPEC’s basket of 12 benchmark crudes increased 98¢ to $99:39/bbl.
Contact Sam Fletcher at firstname.lastname@example.org