Sam Fletcher
Senior Writer
HOUSTON, July 30 -- The September contract surged July 27 to just 1¢ short of tying the record-high closing price for front-month crude on the New York market after the Commerce Department reported a second quarter jump in the US economy.
Growth in the gross domestic product—the best national barometer of economic fitness—jumped to 3.4%/year during the latest quarter from just 0.6% in the first, which was the lowest GDP growth in 4 years. Although the Dow Jones industrial average continued to tumble as a result of the sour housing market, crude traders saw the increased GDP as indicating a greater demand for fuel (OGJ Online, July 30, 2007).
Analysts at the Societe Generale Group in Paris said that last year's record high crude prices remain targets in current crude markets but that technical indicators seem to have run out of steam. Some profit-taking could occur on weakening technical indicators, they said.
However, Adam Sieminski, chief energy economist, Deutsche Bank AG, New York, warned that the remaining possibilities of hot summer weather in the US, a hectic hurricane season during the peak months of August-October, and geopolitical pressures in other parts of the world raise the risks of higher prices over the next few months. "We believe the options market is wrong to dismiss the risks of an oil price spike in an environment where world growth remains strong," he said.
Having overtaken Japan as the world's second largest oil-consuming nation in 2005, China's demand for oil could hit 10 million b/d "or roughly half the level of US consumption" by 2015, Sieminski said. "In the near term, the Beijing Olympics threaten to surprise oil demand growth to the upside next year," he said.
Sieminski reiterated warnings that the recent earthquake that forced the shutdown of the Kashiwasaki-Kariwa nuclear power plant in Japan will soon tighten world energy supplies. "To put this outage into context, Japan is the world's second largest oil importer. It imports approximately 86% of its energy use, and nuclear power represents just over 11% of energy consumed in Japan. In terms of power generation in Japan, nuclear is the top fuel of choice, generating 31% of total power, followed by coal at 25% and natural gas at 24%."
He said, "Consequently the nuclear outage increased the demand [for] competitive fuels and thus further tightens an already stretched supply-demand balance given the structural underutilization of US refineries."
The Kashiwasaki- Kariwa nuclear power plant could be closed for a year, and other Japanese nuclear plants potentially may be closed temporarily for safety inspections. Sieminski noted that in 2003, the Tokyo Electric Power Co., which operates the Kashiwasaki-Kariwa plant, had to close all 17 of its nuclear reactors for inspection and maintenance. "This consequently led to increases in Japan's fuel oil and LNG imports, because the marginal swing power supply capacity in Japan is mainly fossil fuel-based, owing to their higher variable running costs," said Sieminski.
Energy prices
The September contract for benchmark US light, sweet crudes shot up by $2.07 to $77.02/bbl July 27, more than wiping out the previous session's loss on the New York Mercantile Exchange. The record high closing price for a front-month crude contract was $77.03/bbl on July 14, 2006, amid fears that fighting between Israel and the Hezbollah militia in Lebanon might spread to other parts of the Middle East. Crude futures hit a record intraday high of $78.40/bbl on NYMEX that same date.
The October contract escalated by $1.84 to $76.31/bbl on NYMEX. On the US spot market, WTI at Cushing, Okla., was up $2.07 to $77.03/bbl. Heating oil for August delivery climbed 4.03¢ to $2.07/gal on NYMEX. The August contract for reformulated blendstock for oxygenate blending (RBOB) increased by 2.58¢ to $2.10/gal.
The expiring August natural gas contract continued climbing, up 16.7¢ to $6.11/MMbtu. On the US spot market, gas at Henry Hub, La., dropped 4.5¢ to $5.79/MMbtu. Sieminski said, "The lack of any summer heat, building storage levels, and downgrades to the US hurricane season are taking their toll on natural gas prices, which are at their lowest levels since December."
Analysts in the Houston office of Raymond James & Associates Inc. said July 30, "We now believe that the gas markets could be headed for a late summer meltdown similar to what we saw last year" when front-month gas contracts "plunged from nearly $8/Mcf in early August to the low of $4/Mcf at the end of September." As a result, Raymond James has lowered its natural gas price estimates to $6/Mcf from $6.50/Mcf for the third quarter and to $6.50/Mcf from $7.50/Mcf for the fourth quarter of 2007. However, it raised its oil price estimate to $73/bbl from $67/bbl for the third quarter because of the recent strength of the crude market.
In London, the September IPE contract for North Sea Brent crude gained $1.08 to $76.26/bbl. Gas oil for August fell $10.25 to $646/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 11 reference crudes lost 66¢ to $72.22/bbl on July 27.
Contact Sam Fletcher at [email protected]
