MARKET WATCHCrude futures price makes biggest 1-day gain of year

June 2, 2005
Energy prices soared June 1 in a surprise rally that some said seemingly defied market fundamentals.

Sam Fletcher
Senior Writer

HOUSTON, June 2 -- Energy prices soared June 1 in a surprise rally that some said seemingly defied market fundamentals.

But while the oil price spike "looks overdone," it nevertheless "is indicative of underlying oil market fundamentals that remain tight," said analysts in the Houston office of Raymond James & Associates Inc. In a June 2 report, they said, "Recent US inventory builds seem to be moderating. The Organization of Petroleum Exporting Countries' excess capacity is still the lowest in 30 years. And just today, the Russian energy minister said that Russian oil production in May was stagnant for the eighth consecutive month. This is largely due to an ongoing production decline at the assets that are still owned by the embattled [OAO] Yukos."

"OPEC is not expected to boost quotas at its upcoming June 15 meeting although it continues to increase output to bolster inventories ahead of the expected 2 million b/d year-over-year fourth quarter surge in demand. Overall, our projections assume a slight build in US crude oil inventories throughout the year but with the geopolitical [and] limited-spare-capacity premium remaining near recent levels," said Robert S. Morris, Banc of America Securities, New York, in a separate report June 2.

Meanwhile, the Energy Information Administration reported June 2 that commercial US inventories of crude increased by 1.4 million bbl to 333.8 million bbl during the week ended May 27. That weekly report was delayed one day by the Memorial Day holiday in the US. Gasoline stocks increased by 1.3 million bbl to 216.7 million bbl during the same period. Distillate fuel stocks gained by 700,000 bbl to 106.4 million bbl, with an increase in diesel fuel outstripping a surprising drop in heating oil, EIA officials said.

Crude imports into the US increased by 387,000 b/d to 10.7 million b/d during the same period. Input of crude into US refineries was up by 243,000 b/d to nearly 16.1 million b/d, with refineries operating at 96.2% of capacity. Gasoline production rose, while production of distillate fuel remained relatively flat.

Energy prices
The July contract for benchmark US sweet, light crudes closed at $54.60/bbl, up by $2.63 for the day after trading as high as $54.70/bbl June 1 on the New York Mercantile Exchange. "In dollar terms, this was the largest upward move in oil prices year-to-date, taking oil to its highest level since April," said Raymond James analysts. The August contract gained $2.67 to $55.42/bbl on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., increased by $2.63 to $54.61/bbl.

"The immediate cause of the oil spike appears to have been a 6% jump in heating oil prices," Raymond James analysts said. "Heating oil, along with diesel, is a widely used distillate product. The market is concerned about the level of distillate inventories, which are essentially flat relative to a year ago. US demand for distillates is up about 3% year-over-year,"

Heating oil for July delivery shot up by 9.05¢ to $1.54/gal June 1 on NYMEX. Gasoline for the same month jumped by 7.72¢, also to $1.54/gal. "In recent months, there have been a series of refinery outages, both in the US and abroad. While none of them had a material impact on supply of refined product, the psychological effect has been positive for product prices and therefore crude," said the Raymond James analysts.

The July natural gas contract escalated by 41¢ to $6.79/MMbtu on NYMEX, "after hitting a 3-week spot continuation chart high," said analysts at Enerfax Daily.

"The downside for natural gas prices appears to be fairly limited relative to oil prices since natural gas prices in the Northeast [US] have now dropped to nearly even with residual fuel oil prices on a pure energy equivalent basis, with an extended further relative drop likely to induce some fuel switching back to natural gas," Morris said. "Overall, we foresee natural gas supply and demand being fairly balanced this summer, assuming normal temperatures and no hurricane or storm-related interruptions."

In London, the July contract for North Sea Brent crude jumped by $2.54 to $53.27/bbl on the International Petroleum Exchange.

The average price for OPEC's basket of seven benchmark crudes increased by $1.70 to $49.30/bbl on June 1.

Contact Sam Fletcher at [email protected]