Market Journal

After intraday trading as low as $67.15/bbl earlier in the week, the July contract for benchmark US light, sweet crudes rebounded to $74.55/bbl May 27 on the New York Mercantile Exchange in a 2-day rally that some hoped signaled a return of investors’ risk appetite, although the contract dropped to $73.97/bbl in the next session.

Tightening storage capacity at Cushing, Okla., pushed the front-month crude contract price down 1.7% in the New York market in mid-May.

Despite the overhanging pall of the tragic Macondo blowout in the Gulf of Mexico, the 2010 Offshore Technology Conference on May 3-6 in Houston was generally upbeat with business better than a year ago and hopes of steady improvement through the rest of the year.

The US oil market has become “a combination of pockets of tightness and pockets of surplus, with a series of contrasting regional and product quality distortions to boot,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London.

Crude prices broke through the psychological $80/bbl barrier in April and show little sign of slipping back, “despite the Organization of Petroleum Exporting Countries’ usual (but misplaced) concerns about second-quarter weakness,” said analysts at the Centre for Global Energy Studies, London.

Prospects for increased US gasoline demand have been written off by much of the industry and many analysts to the point that it has become “a sort of conventional wisdom” that the market “will decline inexorably from this point,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London.

It is “now quite definitely a $80-90/bbl world” for crude prices, “and within that world $90 may well prove to be a relatively elastic upper bound,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, on Apr. 9.

The front-month contract for benchmark US light, sweet crudes closed at a 17-month of $83.76/bbl Mar. 31 on the New York Mercantile Exchange on a weaker dollar and momentum from earlier gains.

No big surprises were reported at the recent National Petrochemical & Refiners Association meeting in Phoenix, Ariz., although analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, said the session that “captured the general mood” was titled, “Climate Change Armageddon.”

Oil prices had a strong start this year with the first quarter on course for the fifth-highest quarterly average price ever for key benchmark crudes and “on track to average even higher for the balance of the year,” said Costanza Jacazio, vice-president of Barclays Capital Commodities Research in New York.

After failing to sustain pushes above $80/bbl in four previous sessions, April crude closed at $80.87/bbl Mar. 3, up $1.19 for the day in the highest closing for a front-month contract in 7 weeks in the New York market as the euro strengthened against the US dollar.

Unlike most producers outside the Organization of Petroleum Exporting Countries, the US “put up remarkably strong oil production growth of 7.1% in 2009” after “a nearly nonstop decline” for the past 3 decades, said analysts in the Houston office of Raymond James & Associates Inc.

There has been a gradual compression this year of the futures price contango for key benchmark crudes, with the narrowing most evident at the front of the North Sea Brent curve.

The US Department of Energy’s Energy Information Administration may be underestimating natural gas demand with much of the US South and Northeast enveloped in yet another round of cold weather that boosted gas and electricity demand in January through early February, said Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC.

Energy prices flopped with crude down 5% for its biggest 1-day loss in 6 months Feb. 4, then tumbled below $70/bbl to a 7-week low before “bottom pickers” bid prices back above $71/bbl Feb. 5 on the New York market, amid growing global concern that the weak economies of Portugal, Ireland, Italy, Greece, and Spain (PIIGS) may undermine Europe’s recovery from the recession.

The volume of crude in storage on supertankers at sea has fallen well below 40 million bbl from a peak of 100 million bbl last May.

The International Energy Agency in Paris estimated in December the sustainable production capacity for the Organization of Petroleum Exporting Countries at 35.4 million b/d, with actual output at 29.05 million b/d, leaving a spare capacity of 6.35 million b/d.

This year will likely see a transition of energy markets back to “traditional fundamentals” of supply, demand, and inventories in place of the financial, currency, and equity market drivers that dominated 2009,” said Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC.

Colder weather across much of the northern hemisphere in late December and early January accelerated the burn-off of a global distillate fuel surplus.