MARKET WATCH: Crude price pulls back from record high

Crude prices fell June 9, giving back about a quarter of the record gains from the previous two trading sessions in the New York futures market.

Sam Fletcher
Senior Writer

HOUSTON, June 10 -- Crude prices fell June 9, giving back about a quarter of the record gains from the previous two trading sessions in the New York futures market, after average retail gasoline prices in the US surpassed $4/gal over the weekend.

The International Energy Agency in Paris said last week's rally wiped out 3 weeks of retrenchment in the oil market as crude prices surged to almost $140/bbl June 6 after an Israeli official said an attack on Iranian nuclear facilities was inevitable. That occurred against a background of tight supplies "with no clear sign of the usual second-quarter crude oil stock build," said IEA.

Analysts at Morgan Stanley and Goldman Sachs Group Inc. have predicted benchmark US crude will hit $150/bbl, possibly by July 4. However, Chakib Khelil, president of the Organization of the Petroleum Exporting Countries, said crude should be trading at $70/bbl if not for a weak dollar and geopolitical problems.

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. said June 10, "After a slight pullback yesterday, crude has bounced back over $3/bbl this morning, fueled by the release of the IEA's latest estimates." Analysts at Pritchard Capital Partners LLC, New Orleans, said, "Heating oil appears leading the advance, in spite of temperatures that are forecast to reach into triple-digit territory throughout the greater New York area today."

IEA outlook
Oil stocks among members of the Organization for Economic Cooperation and Development fell by 8.1 million bbl in April to 2.56 billion bbl "in stark contrast to the typical build," IEA reported. "An 11 million bbl draw in US gasoline stocks removed the large first quarter surplus while crude and distillate cover tightened in Europe and North America. Total oil cover remains above average at 53.4 days."

IEA lowered its estimate of 2008 global demand for oil products by 80,000 b/d to 86.8 million b/d following the reduction of fuel price subsidies in several developing countries. Global growth is cut even more steeply by 230,000 b/d to a total growth of 800,000 b/d "when historical upward revisions to 2006 and 2007 data are factored in," said IEA officials.

Raymond James analysts noted, "Since July 2007, the IEA has cut its 2008 demand growth estimate by more than half."

Worldwide crude supplies increased by 490,000 b/d to 86.6 million b/d in May, with OPEC supply up by 395,000 b/d to 32.3 million b/d. Saudi Arabia, Nigeria, and Angola contributed to OPEC's increase, with Iraqi output at a 6-year high. However, Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Nigeria remains a risk, with the report of a second attack in 2 days on a supply vessel and [rebels] threatening retaliation for the army making incursion into the land of 'peace-loving communities' a.k.a. the base camps of leaders of two militant groups (three camps have been reported blazed and razed over the weekend)."

Meanwhile, increased production and delays in field commissioning has reduced OPEC's effective spare output capacity below 2 million b/d. IEA raised the call on OPEC crude and stock change in 2008 by 300,000 b/d to 31.6 million b/d. Meanwhile, the Saudi Arabian cabinet said it would meet "soon" with oil-consuming nations to discuss the spike in oil prices and also expressed a willingness to increase supply.

IEA reported "extensive" reductions in non-OPEC production during first quarter and lower supplies of biofuels and natural gas liquids for the rest of this year. "Despite this, a recovery in non-OPEC output is forecast for the second half of 2008," officials said.

Energy prices
The July contract for benchmark US light, sweet crudes traded at $133-138.25/bbl June 9 before closing at $134.35/bbl, down $4.19 for the day on the on the New York Mercantile Exchange. The August contract fell $3.95 to $134.75/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $4.20 to $134.35/bbl. Heating oil for July delivery declined 9.7¢ to $3.88/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) fell 15.4¢ to $3.39/gal.

Pritchard Capital analysts said, "It's hard to imagine RBOB—with prices up some 60% from this time last year—is the laggard of the futures complex, but gasoline cracks are currently just $8.12/bbl. That compares with a margin of $24.32/bbl this time last year. Gasoline prices throughout the country pulled back with the RBOB futures decline yesterday, but prices are still exceedingly inflated, particularly on the West Coast."

They said, "While gasoline prices in cash markets east of the Rockies are significantly less than those seen on the West Coast, the year-on-year comparisons there too are staggering. In the New York Harbor, regular unleaded traded yesterday at an 11.5¢ discount to futures, or $3.279/gal. A 25,000 bbl lot at that level represents a total sale price of $3.4 million, which compares with a sticker price of $2.2 million a year ago.

Jakob said, "RBOB continues to be hit by demand destruction, and the gasoline crack has collapsed by more than $8/bbl over the last 5 days. It is now at a multiyear low for the season and at values expected to be seen in winter not in summer. The backwardation on RBOB is also falling and a move to a contango…should not be excluded. With such disastrous gasoline economics, the US refineries will have less of an incentive to run full blast and as a consequence the WTI prompt contango is eroding slightly further."

The July natural gas contract lost 8.9¢ to $12.60/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $12.72/MMbtu. Pritchard Capital analysts said, "July natural gas futures retreated Monday as much of the impetus for higher prices in play last week—forecast hot weather and soaring oil prices—dissipated." They said, "Longer term, some analysts are focusing on the recent hand-in-glove relationship between natural gas and oil trading."

In London, the July IPE contract for North Sea Brent lost $3.78 to $133.91/bbl. However, the June contract for gas oil continued to climb, up $11 to $1,259.75/tonne.

The average price for OPEC's basket of 13 benchmark crudes shot up by $4.76 to $130.87/bbl on June 10.

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