MARKET WATCHEnergy futures prices rally Monday from last week's fall

Sam Fletcher
Senior Writer

HOUSTON, June 17 -- Energy futures prices generally rallied Monday after falling last week at the end of what analysts described as "an impressive 5-week run."

"Oil prices surged past $32/bbl early in the week (ended June 13) after a larger-than-expected drop in US crude oil inventories was reported (for the week of June 6) and then held steady after (the Organization of Petroleum Exporting Countries), as expected, extended its current production ceiling through September. Oil prices then dropped sharply after Iraq awarded tenders for 9.5 million bbl of oil held in inventory since before the US-led war and the International Energy Agency made an unexpected upward revision to its global inventory estimate," said Robert S. Morris, Banc of America Securities LLC, New York, in a summary issued Monday.

A sharp drop in natural gas futures prices on June 12 after the US Energy Information Administration reported a record injection of 125 bcf of gas into US storage also helped pull down oil prices last week.

'Efficient' market
"Our take on this large gas injection is that this is exactly how an efficient gas market should work," said John Tysseland and James M. Rollyson, analysts in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla. "As we have said many times before, the gas market will find the appropriate gas price that kills enough price-sensitive gas demand to rebalance the system and get summer-ending gas storage to a comfortable level."

Based on "a big assumption" that the recent gas storage data are accurate, the two analysts said, the equilibrium gas prices appears to be $5-7/Mcf. However, Tysseland and Rollyson noted, abnormally mild weather in much of the US this spring "makes it very difficult to determine exactly how much of the increased injection has been true demand destruction."

As rising prices for natural gas outpaced those for natural gas liquids, they said, more NGL has been left in the natural gas stream, increasing the amount of gas available to the market. As a result, the Raymond James analysts figure that the amount of available gas has increased as 400 MMcfd since the start of this year and as much as 750 MMcfd from year-ago levels. "As history tells us, however, this is not a sustainable trend," they said.

Moreover, they said, average consumption of distillate and residual fuel oil has increased by more than 500,000 b/d from year-ago levels "in the January-March timeframe." They also noted that natural gas prices again surged above $6/Mcf in recent weeks, despite "particularly mild" weather. "Assuming that all this demand growth in oil-related products is at the expense of natural gas demand, it means that an average of nearly 2.5 bcfd has been taken out of the market over the last 3 weeks due to higher natural gas prices," analysts said.

NYMEX prices
The July contract for natural gas gained 3.1¢ to $5.71/Mcf Monday on the New York Mercantile Exchange. "The market opened lower, but quickly traded higher, reaching $5.70(/Mcf) by mid-morning before dipping back and trading around $5.60(/Mcf)" until traders began buying commodities to close out a short sale late in the session, analysts at Enerfax Daily reported Tuesday.

Cash prices for gas on the spot market are still lagging behind futures market prices "because of the lack of hot weather to kick up air conditioning demand," they said. "While a hot summer or an active hurricane season could still drive prices higher, the recent record pace of stock builds is likely to keep buyers cautious in the short-term, particularly with fairly mild weather forecasts this week. In recent weeks, storage injections have been considerably higher than estimates based on weather alone. But longer-term concerns about low storage levels and slipping production should limit the downside, particularly with summer set to begin later this week and an uncertain hurricane season still ahead."

The July contract for benchmark US light, sweet crudes gained 53¢ to $31.18/bbl Monday on NYMEX, while the August position advanced by 24¢ to $29.57/bbl. Heating oil for July delivery rose by 0.17¢ to 74.39¢/gal. However, unleaded gasoline for the same month slipped by 0.95¢ to 84.92¢/gal, despite low inventories of gasoline in the US amid indications of a robust driving season this summer.

Analysts said an improved national economy and reduced fears of terrorism are encouraging US motorists to take to the road.

In London, the August contract for North Sea Brent oil increased by 26¢ to $26.65/bbl Monday on the International Petroleum Exchange. However, brokers expressed doubts that market will advance much beyond current price levels with no changes expected in OPEC's current production quotas at its next meeting on July 31, in the face of Iraq's expected slow return to world oil markets.

The July natural gas contract inched up 1.2¢ to the equivalent of $2.90/Mcf Monday on IPE.

The average price for OPEC's basket of seven benchmark crudes lost 26¢ to $26.44/bbl Monday.

Contact Sam Fletcher at [email protected]