Sam Fletcher
OGJ Senior Writer
HOUSTON, Aug. 14 -- Energy prices continued to rally Aug. 13 with the front-month crude contract temporarily topping $78/bbl in intraday trading before closing a little above $77/bbl on the New York market.
“The current economic outlook is in a state of what [Ben S.] Bernanke[, chairman of the US Federal Reserve,] likes to call ‘unusual uncertainty,’ but investors squinted through the haze and managed to find several economic data points to guide them,” said analysts in the Houston office of Raymond James & Associates Inc. “China reported strong industrial growth over the weekend, and new, more favorable global banking rules helped equities post healthy gains. Crude enjoyed gains from the broader market move and was also helped by the shutdown of the Enbridge pipeline as prices closed at a 1-month high (up 1.1%). Not to be outdone, natural gas ended the day up 1.8%.”
Enbridge Energy Partners LP shut in its 670,000 b/d 6A crude pipeline from Superior, Wis., to Griffith, Ind., Sept. 9 due to a leak in suburban Chicago (OGJ Online, Sept. 13, 2010). It was reported Sept. 14 part of the leaking pipeline has been removed and is being replaced.
Olivier Jakob at Petromatrix in Zug, Switzerland, said, “If the Environmental Protection Agency delays the restart of the pipeline, the US government could still propose to open the Strategic Petroleum Reserve since such a disruption on a key supply pipeline would be eligible for a release of the strategic stocks. This possibility has not yet received much attention.”
Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said industrial production in China grew by 13.9% year-over-year in August vs. consensus of a 13% gain. “Oil also got a boost after the European Commission raised its estimate of 2010 gross domestic product growth in the euro region from earlier 0.9% to 1.7%. The euro too gained 1.5% against the dollar and provided additional support to prices,” he said.
Sharma reported, “Signs of recovery staying the course have also encouraged the risk capital to flow back into the market as the funds raised their long positions in the fuel by 8%, the first increase in 5 weeks.” Declining concerns about the economic slowdown as reflected by the strength in equities markets also helped boost gas prices.
“Storage buying helped the natural gas outlook through the increased possibility of Hurricane Igor, a Category 4 storm, missing the Gulf of Mexico producing regions. However, the projections of normal temperature in the US Northeast and the Midwest this week might dampen the price support,” he said.
Pritchard Capital Partners noted corporate shares of exploration and production companies have rallied 9.6% since bottoming Aug. 26, ahead of the oil service index at 9.1% and the Standard & Poor’s 500 index at 7.1%, after falling precipitously on plummeting natural gas prices. “We view the current natural gas price as unsustainable (our analysis shows an industry breakeven natural gas price of $5.65/Mcf based on 2009 cost structures, and we think costs are now 15-20% higher),” they said.
Jakob said open interest in benchmark US crude futures declined Sept. 10. That, combined with the surge of volume, “suggests that indeed it is short-covering that was the fuel behind Friday’s fire.” Jakob said, “Short covering will move a market higher, but fresh long interest will be needed to sustain the current rally; meanwhile investors in the US Oil Fund have used the recent strength to offload some of their holdings. On an intraday basis, trading the correlations yesterday was not a winning trade as crude, the dollar, and equities were falling all at the same time” in the second half of the New York trading session.
On the tropical weather front, Jakob said, “Igor and Julia are traveling towards the Mid-Atlantic and the low in the Caribbean is relatively weak and expected to interact with land over the Yucatan. It is difficult at this stage to give it any significant premium. So far in the hurricane season there has been no damage to any oil installations and only 4 million bbl of crude oil production have suffered delays (Alex and Bonnie). This makes it easier for the US to cope with the Enbridge disruption.”
Energy prices
The October contract for benchmark US sweet, light crudes gained 74¢ to close at $77.19/bbl Sept. 13 on the New York Mercantile Exchange. The November contract climbed 66¢ to $78.03/bbl. On the US spot market, WTI at Cushing, Okla., was up 74¢ to $77.19/bbl. Heating oil for October delivery increased 1.83¢ to $2.12/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month inched up 0.75¢ to $1.97/gal.
The October contract for natural gas advanced 5.5¢ to $3.94/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 4¢ to $3.89/MMbtu.
In London, the October IPE contract for North Sea Brent increased 87¢ to $79.03/bbl. The new front-month October gas oil contract escalated by $9.25 to $647.25/tonne.
The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes gained 40¢ to $75.06/bbl.
OPEC anniversary
Sept. 14 marks the 50th anniversary of OPEC, whose charter was signed in 1960 by its five founding nations at a conference in Baghdad.
“Creation of OPEC effectively signaled the beginning of the end of Western company dominance of the upstream oil industry as the cartel gained market power by using its excess capacity to manipulate world oil prices,” said Raymond James analysts. OPEC now has 12 member countries, which account for 40% of the world's oil supply and more than 75% of proved reserves.
Raymond James said, “Currently, OPEC is still able to support a floor for oil prices, but increasingly over the next several years, its goal will be to do the opposite—restrain future oil price increases to limit the incentives for significant oil substitution. As production growth slows, the OPEC of the next 50 years will certainly be a different—and generally weaker—organization than the one that marks its birthday today.”
On the other hand, OPEC Sec. Gen. Abdalla Salem El-Badri said OPEC celebrates its anniversary “with a feeling of achievement and satisfaction, together with the firm intention of remaining true to its principles well into the future, to the benefit of its own member countries' national development, international oil supply, world economic growth, poverty eradication, and the global community at large.”
Contact Sam Fletcher at [email protected].
