The front-month natural gas contract was knocking at the $8/MMbtu level in intraday trading May 30-31 in New York, with investors expecting warmer temperatures across most of the US.
The July natural gas contract traded as high as $8/MMbtu on May 31 on the New York Mercantile Exchange before closing at $7.94/MMbtu, down just 0.06¢ for the day. By the close of trading June 1, it had dropped to $7.88/MMbtu. “Another triple digit storage injection offset forecasts for hotter weather,” explained analysts at Enerfax Daily.
The Energy Information Administration reported the injection of 107 bcf of natural gas into US underground storage in the week ended May 25, up from 104 bcf the prior week. US gas storage totaled 2.1 tcf, down by 179 bcf from last year’s total at that time but 355 bcf above the 5-year average.
That injection figure implied “that we are 1.9 bcfd looser year-over-year on a weather-adjusted basis,” said analysts at Raymond James & Associates Inc. in Houston. “While an increasing price incentive to burn natural gas over crude derivatives is serving to boost gas demand, the positive fuel-switching impact has not been enough to offset LNG imports and liquid-stripping trends in the near term,” they said.
The market also was preparing for the hurricane season, which began June 1.
Crude prices fluctuate
The front-month crude contract price fell to the lowest level in more than 2 months as NYMEX reopened May 29 after the 3-day Memorial Day weekend to an apparent easing of both global geopolitical tensions and refinery problems. The July contract for crude traded at $62.54-65.24/bbl before closing at $63.15/bbl, down by $2.05 for the day. By June 1, it had climbed back to $65.08/bbl.
EIA said commercial inventories of US benchmark light, sweet crudes fell 2 million bbl to 342.2 million bbl during the week ended May 25. Gasoline stocks increased more than expected, up 1.3 million bbl to 198 million bbl that week, but were still well below average for the summer driving season that began May 26-28. During the same week, total gasoline imports averaged 1.6 million b/d, the third-highest weekly average ever. Input of crude into US refineries dropped by 76,000 b/d to 15.6 million b/d, and utilization rates of US refineries remained relatively flat at 91.1% of capacity. “We find crude oil remaining undecided on its direction,” said Olivier Jakob, Petromatrix GMBH, Zug, Switzerland.
Meanwhile, Raymond James analysts said, “With the Organization of Petroleum Exporting Countries itself struggling to bring fresh capacity online, overall growth in global oil supply appears barely sufficient to keep up with demand, let alone increasing excess capacity.” Nor does it appear that non-OPEC producers will contribute any meaningful supply additions, given the mature characteristics of most of those fields. “Indeed, a permanent non-OPEC peak seems likely in the next 5-10 years. Non-OPEC growth is highly dependent on Russian growth and, given the current policy environment, Russia is unlikely to post the growth it experienced in the early part of this decade,” they reported.
Raymond James reported, “The world is likely to continue in an environment of a wafer-thin excess capacity ‘cushion’ for the foreseeable future. Given this tight supply-demand equation, threats of even minor supply disruptions are bound to have a large impact on already volatile oil prices, and the oil markets look set to continue to price in a substantial geopolitical risk premium.”
Jakob said imports of crude by China and India during April surpassed “for the first time ever” crude imports by South Korea and Japan. “As Japanese refineries come back from maintenance, this should remain for now a temporary situation, but this structural shift in the regional energy balance should continue and become more permanent over the next 2 years,” he said. “Compared to April 2006, China and India crude imports have grown by about the same quantity. South Korea imports remain about unchanged, while Japan continues to import much lower volumes than last year.”
Among Asian countries such as Japan and South Korea, Jakob said, refinery runs will now start to increase as refineries come out of the seasonal maintenance and should bring the region to new record high crude imports. “The real test to OPEC compliance [with its production quota] will come when Japanese crude oil demand starts to rise again, and indications from OPEC trackers are that OPEC supply is starting to slowly increase,” he said.
(Online June 4, 2007; author’s e-mail: [email protected])
