Sam Fletcher
OGJ Senior Writer
HOUSTON, June 15 -- Oil and gas prices fell June 12, ending a 3-day rally that pushed crude above $73/bbl on the New York Mercantile Exchange, as the dollar strengthened and the Organization of Petroleum Exporting Countries reported its production increased for the second consecutive month, up 135,000 b/d to 28.27 million b/d in May.
The 11 OPEC members, excluding Iraq, increased their production by 118,800 b/d to 25.9 million b/d in May (OGJ Online, June 12, 2009). Analysts expect compliance with official production quotas will continue to erode as crude prices rise.
“Last week there was a pick-up in NYMEX volumes and on [June 12] there was an increase of nearly 20,000 contracts in crude open interest. An open interest gain in an ‘up session’ is often thought to be reflective of new buying, as opposed to short covering,” said analysts at Pritchard Capital Partners LLC, New Orleans.
“The increase in open interest comes at a time when the commodity space is appearing overbought, and some are calling for a pullback to ease the overbought condition. Oil forecasters are also unclear as both the International Energy Agency and the US Energy Information Administration raised their demand estimates, but OPEC reduced its forecast for global oil consumption, although it does believe that global oil demand was stabilizing. The strongest support for oil came from data that showed Chinese industrial growth and demand rebounded in May,” they said.
Market outlooks
IEA “stunned us all in May with an extraordinarily gloomy outlook for world oil demand in 2009,” going “from minus 1.6 million b/d to minus 2.6 million b/d in one jump,” said analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK. In its latest report, IEA “started rowing back in the opposite direction.” In IEA’s June oil market report, KBC analysts note, “Demand is now expected to fall by ‘only’ 2.5 million b/d. This may seem a small change to you, but it could be the first sign that the doom-mongers have overdone it as far as demand is concerned and that the outlook in 2009 will be closer to the 1.9 million b/d fall long forecast by KBC Market Services.”
They observed, “Unfortunately, the IEA do not yet feel brave enough to share their view on demand in 2010. This shyness is rather baffling as we are already well into June but here at KBC Market Services we are less reticent, and we believe that global oil demand next year will be down, albeit by a paltry 300,000 b/d.”
Crude was lower in early trading June 15 “on a recovery in the US dollar, which reduces oil's appeal as a currency hedge, despite news out of Iran and Nigeria that would imply heightened supply risk,” analysts reported in the Houston office of Raymond James & Associates Inc. “The reelection of Mahmoud Ahmadinejad in Iran, the fifth largest oil producer, has led to violent protests in the nation's capital city. In Nigeria, the sixth largest oil producer, two Chevron Corp. operated oil wells and pipelines were destroyed by rebels.”
Hardliner Ahmadinejad was reelected with 62.6% of the vote, while his moderate rival Mir Hossein Mousavi received only 33.8%. However, Raymond James noted, “Many polls prior to the election showed Mousavi in the lead, so charges of vote-rigging are widespread. There was heavy unrest in Tehran over the weekend, though the regime seems firmly in control for now. Iran's Supreme Leader has publicly backed Ahmadinejad following the election results.”
Raymond James analysts said, “In the short term, this is incrementally bullish for oil because Ahmadinejad's uncompromising stance on the nuclear program and aggressive rhetoric are set to continue. The risk of a preemptive Israeli strike on Iran is likely to rise the longer Ahmadinejad stays in office. That said, the long-term implications in terms of geopolitical risk are probably more neutral. While a moderate by Iranian standards, it's unclear how much even Mousavi would compromise on the nuclear issue (especially given that in Iran, foreign and security policy is under the Supreme Leader's control, not the president's). And in the final analysis, an Israeli decision on whether to attack is likely to be shaped by broader factors than the personality of Iran's president.”
They said, “Although the near-term oil prices should continue to be highly volatile, we continue to believe that we are in a long-term secular bull market for ‘black gold.’ The market currently likes oil as an inflation hedge. We like it because the long-term fundamentals say oil prices must move higher to ration available supplies. One of the supporting pillars of our fundamental thesis is that prospects for non-OPEC production growth are minimal at best.”
They noted Mexico represents 7% of non-OPEC production and roughly 4% of the world's total oil output. “Mexico has seen its crude production drastically decline in the last several years. The falling output is the result of steep decline rates from maturing oil fields (mainly the Cantarell field), a lack of foreign investment, and a high tax burden on Petroleos Mexicano (Pemex). These declines are so bad that Mexico may become an oil importer within the next 5 years,” said Raymond James analysts.
However, KBC analysts said, “The recent modest improvement in the value of the US dollar and the concerns expressed by some people that speculators will take profits could spark a short-term price correction and puncture the bullish mood.”
KBC analysts added, “Effective August this year the 80-mile Transisthmian Oil Pipeline [in Panama] that traditionally flowed in the Pacific-to-Gulf [of Mexico] direction will start to flow in the opposite direction. The implications are major, with the flow reversal potentially allowing West African crude (Nigeria, Angola) to move to the US West Coast as well as allowing Venezuelan crude to move to China in fulfillment of the desire of President [Hugo] Chavez to ship crude there rather than to the US. Brazil will also have an opportunity to move crude to new markets. If the pipeline’s owners have their way, the capacity of the line will increase 50% to 600,000 b/d. As well as increasing the capacity of the pipeline, the Panama Canal widening project will allow VLCCs to move through it from 2014 onwards. This is a big story.”
Natural gas was up in early trading May 15. “The US Natural Gas Fund will roll its futures position for the first 3 days of the week, and the roll may contribute to some volatility in the NYMEX natural gas contract," said analysts at Pritchard Capital Partners “Although the natural gas contract seems to be holding in the $3.50-4 range, investors continue to think natural gas will trade with a $2 handle. The new cause of concern is that some believe that there are a large number of wells drilled and completed but awaiting production as producers are hoping for higher prices in the future. This is a convenient argument for natural gas bears as it is one that is difficult if not impossible to prove,” they said.
Energy prices
The July contract for benchmark US light, sweet crudes dropped 64¢ to $72.04/bbl June 12 on NYMEX. The August contract fell 73¢ to $72.75/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 64¢ to $72.04/bbl. Heating oil for June delivery declined 1.59¢ to $1.84/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month lost 2.18¢ to $2.04/gal.
The July contract for natural gas fell 7.6¢ to $3.86/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gas gained 5¢ to $3.61/MMbtu.
In London, the July IPE contract for North Sea Brent lost 87¢ to $70.92/bbl. Gas oil for June dropped $6.75 to $582/tonne.
The average price for OPEC’s basket of 12 benchmark crudes declined 42¢ to $70.45/bbl on June 12. So far this year, the OPEC basket has averaged $49.05/bbl.
Contact Sam Fletcher at [email protected].
Rystad Energy.
