Sam Fletcher
OGJ Senior Writer
HOUSTON, May 8 -- Energy prices continued to rally May 7 with natural gas climbing above $4/MMbtu and crude topping $56/bbl as traders shrugged off bearish inventory reports and focused instead on indications of a possible economic turnaround.
In Houston, analysts at Raymond James & Associates Inc. said, "The broader market fell 1% while oil climbed to near a 6-month high. Money has been flowing heavy into commodities this week, and it has helped prop up oil prices as big funds are betting that the worst of the recession is over."
The front-month crude contract climbed above $58/bbl in early trading May 8, "driven by speculation that the worst of the banking crisis and recession is over, signaling fuel consumption will rebound," said analysts at Pritchard Capital Partners LLC, New Orleans. "US Treasury Secretary [Timothy] Geithner eased worries with a benign bank stress test outlook."
Natural gas prices are expected to rise this year due to lower US production levels. "The larger questions are the timing of a production response and the timing and magnitude of a rebound in demand," said Pritchard Capital Partners. "We believe May is when you will see first [gas] production declines, but those numbers are not released until August."
Raymond James analysts said, "After touching multiyear lows a week and a half ago, gas has since rallied over 30% despite a string of bearish data points." But they suspect it is only a "short squeeze" rather than a real bottom.
At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "Oil fundamentals do not support such a move [above $56/bbl] with the year-on-year excess in US oil inventories…together with oil in floating storage amounting to 225 million bbl. Moreover, spare capacity [of the Organization of Petroleum Exporting Countries] has risen to 7.5 million b/d. Where is the shortage?"
As a result of recent market fluctuations, KBC analysts said, "OPEC members must scarcely be able to believe their good fortune. Oil prices are rising as optimism over the economy that has supported equities and weakened the US dollar is also encouraging investment flows to commodities. No opprobrium will be attached to the cartel for this unnecessarily premature rise in oil prices in terms of oil market fundamentals."
They noted, "Some years ago, physical oil market fundamentals used to be the sole driver of oil prices, but the growing role of financials has now turned full circle. Fundamentals are now sidelined as the massed ranks of investors in oil futures looking for quick profit appear to be chanting 'stocks are rising, we don't care.' Capitalism, it seems, is alive and well."
KBC reported, "Preliminary March oil sales data for the six main Organization for Economic Cooperation and Development markets show another sharp year-on-year decline of 1.8 million b/d. Demand continued to fall also in South Korea (down 2.5%). However, implied demand in China dipped by just 0.3% and was at the highest level since last September, while new car sales were up by 10% to a record high as consumers responded to Beijing's auto tax cut. In India, domestic oil sales showed growth of 3.9%."
Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Early indications are that China in April printed another record in car sales (according to our tracking that would amount to about 25% growth in April sales for all automobiles and 37% for passenger cars) and continues the recent trend of selling more cars than the US. Chinese consumers would have bought in April 225,000 more passenger cars than last year while US consumers were buying 225,000 less." He said US consumers also bought 200,000 fewer light trucks.
Energy prices
The June contract for benchmark US light, sweet crudes hit $58.57/bbl in intraday trading May 7 before closing at $56.71/bbl, up 37¢ to a new high for 2009 on the New York Mercantile Exchange. The July contract gained 43¢ to $58.02/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 37¢ to $56.71/bbl. Heating oil for June increased 1.39¢ to $1.49/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) advanced 3.75¢ to $1.67/gal.
Natural gas for the same month escalated by 19.4¢ to $4.08/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 26.5¢ to $4.02/MMbtu. "Futures advanced above $4/Mcf for the first time in 6 weeks on prospects for stronger demand, after the US Department of Labor reported better-than-expected initial jobless claims, which raised speculation that the recession is easing. Factories and power plants account for 58% of overall demand," said Pritchard Capital analysts.
In London, the June IPE contract for North Sea Brent crude gained 32¢ to $56.47/bbl. The May gas oil contract climbed $15.25 to $477.25/tonne.
The average price for OPEC's basket of 12 reference crudes increased $1.96 to $56.05/bbl on May 7.
Contact Sam Fletcher at [email protected].