MARKET WATCHCrude oil prices lose ground again

July 1, 2005
Crude oil futures declined for a third consecutive trading session June 30 on the New York market, and analysts forecast volatilty with no end in sight for robust oil and gas pricing.

Paula Dittrick
Senior Staff Writer
HOUSTON, July 1 -- Crude oil futures declined for a third consecutive trading session on the New York Mercantile Exchange, and analysts forecast volatilty with no end in sight for robust oil and gas pricing.

Crude oil price settled at $56.50/bbl on June 30, down by $4.04 from a record NYMEX closing of $60.54/bbl on June 27.

Standard & Poor's analyst John Thieroff said, "Worldwide petroleum demand growth is projected to remain strong during 2005 and 2006, implying that oil has not yet hit a price level that would cause demand destruction."

Thieroff doubts spare production capacity worldwide will expand significantly for 2 years. For some time, traders have expressed nervousness that there is only spare worldwide production capacity of 1 million b/d to 1.4 million b/d.

Stephen Smith of Stephen Smith Energy Associates in Natchez, Miss., called volatility "a rational market response." He foresees an oil price pattern where the NYMEX closing periodically hits $60/bbl or more, prices retreat for a few days, and then regain strength before falling again.

"Oil market nervousness about the ability of world oil supply to meet demand has now become a durable and deeply embedded market concern," Smith said in a June 28 research report.

"In this environment, it should also be no surprise that we are now experiencing the unusual combination of above-normal OECD [Organization for Economic Cooperation and Development] storage levels combined with unusually high oil prices," Smith said. "In this situation, when the adequacy of production capacity becomes the central market issue, the temporary adequacy (or even abundance) of oil in storage becomes a less important price determinant."

He added that, "Any system utilization over 97-98% allows the market to envision countless scenarios for shortage, and to price these various scenarios into and out of the market on a month-to-month basis."

Barclays Capital analyst Paul Horsnell of London maintained his $60.10/bbl average third quarter forecast for West Texas Intermediate on NYMEX. "But we see risks as being skewed to the upside given the coexistence of limited flexibility within the oil system. . . ," he said.

Horsnell expects the second quarter average for WTI will be $53.20, the highest quarterly average and some 30¢ about his mid-May forecast.

Energy prices
The August contract for benchmark US light, sweet crudes closed on June 30 down by 76¢ to $56.50. The September contract dropped 59¢ to $57.64/bbl. On the US spot market, West Texas Intermediate dropped by 76¢ to $56.50/bbl.

Heating oil for July delivery regained strength that had been lost from earlier in the week, rising by 1.75¢ to $1.619/gal on NYMEX.

Gasoline for the same month decreased by 1.24¢ at $1.5721/gal.

The August natural gas contract dipped $1.06 to $6.98/MMbtu June 30. Enerfax Daily analysts said gas futures were driven lower by large EIA storage build, cool temperatures and the crude oil market's downward direction.

In London, the August contract for North Sea Brent crude dropped by 57¢ to $55.58/bbl on the International Petroleum Exchange.

The average price for the Organization of Petroleum Exporting Countries' new basket of 11 benchmark crudes slumped 49¢ to $52.01/bbl.

Gas storage numbers
Meanwhile in its weekly report on US natural gas storage, the Energy Information Administration reported 92 bcf injected during the week ended June 24 compared with a 75 bcf injection from the previous week, and a 93 bcf injection for the same period last year.

US gas storage totaled 2.12 tcf as of June 24 compared 1.925 tcf for the same time last year.

UBS Securities LLC analyst Ronald J. Barone said, "Given overall market dynamics so far this week (including warmer than normal temperatures in the major gas-consuming regions of the country), we expect a significantly smaller injection to be reported next week.

"This figure, when compared against last year's 109 Bcf injection, should yield a considerable decline in the surplus upon the release of the next EIA report."
Contact Paula Dittrick at [email protected]