MARKET WATCHImproved economy and growing demand pushes oil futures prices past $30/bbl
Sam Fletcher
Senior Writer
HOUSTON, June 3 -- Oil futures prices jumped above $30/bbl Monday as new indications of an improving general economy signaled to traders a growing demand for energy vs. tightening supplies.
Earlier concerns of a possible oversupply as Iraq moved to resume exporting oil later this month were offset by Saudi Arabia reiterating its pledge to reduce its oil output and by an unexpected drop in US gasoline inventories last week, said Robert S. Morris, Banc of America Securities, New York.
"Officials in Iraq have stated that production should rise to 1.5 million b/d later this month, although 500,000-600,000 b/d should go for internal consumption while exports will take 6 weeks to reach the US," he reported Monday. Beginning this month, Saudi Arabia will shoulder 1.2 million b/d of the 2 million b/d reduction that the 10 active members of the Organization of Petroleum Exporting Countries promised in April.
"Meanwhile, it is still unclear what decision OPEC will make regarding future production at its upcoming summit in Doha, Qatar, on June 11, although headlines in this regard along with inventory trends should be the critical variables for oil prices near term," said Morris.
Energy futures prices
The July contract for benchmark US light, sweet crudes shot up by $1.15/ to $30.71/bbl Monday on the New York Mercantile Exchange, while the August position advanced by $1.10 to $29.59/bbl. Unleaded gasoline for July delivery escalated by 3.37¢ to 88.67¢/gal. Heating oil for the same month climbed 1.77¢ to 76.59¢/gal.
In London, the July contract for North Sea Brent oil jumped by $1.06 to $27.38/bbl on the International Petroleum Exchange. The July natural gas contract fell by 4.8¢ to $2.69/Mcf on IPE.
On NYMEX, the July natural gas contract increased by 16.1¢ to $6.41/Mcf, "driven by a strong rally in crude oil and some follow through technical buying after Friday's break of near resistance," analysts reported Tuesday at Enerfax Daily.
Gas market outlook
"Longer-term concerns about low (US gas) storage and slipping production are likely to limit any downside near term, particularly with an uncertain summer cooling season still ahead, along with a high number of predicted hurricanes," the analysts said. "However, recently injections (of gas into US underground storage) have exceeded expectations based on weather alone, leading some to believe that demand is also falling because of the high prices."
Morris previously indicated that roughly 5.5 bcfd of US gas demand would have to be "backed out" through October for US gas inventories to build to 2.8 tcf by November. The amount that has been backed out so far, he said Monday, "appears to be slightly above 4.5 bcfd. This includes roughly 3 bcfd of fuel switching out of the total 4 bcfd of natural gas demand that we estimate is capable of switching to fuel oil or distillates."
To back out the full 5.5 bcfd, Morris said, "natural gas prices need to be in the range of $5.50-6/(Mcf), or perhaps higher depending on oil prices and summer temperatures." However, J. Marshall Adkins, an analyst in the Houston office of Raymond James & Associates Inc., St. Petersburg, Fla., said US gas supply is still falling fast, down 3-4% from year-ago levels. Moreover, he said, "Thanks to the industrial demand destruction that occurred in 2001, $5-6/Mcf natural gas prices have done little thus far to impact demand this time around."
He said, "It remains clear that the current supply-demand-inventory situation must eventually drive and maintain prices high enough for fuel switching to occur, a fact that hasn't yet happened to any great degree. Accordingly, we feel very confident that $6+/Mcf gas is here to stay, with further upside potential."
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