MARKET WATCH: Crude price climbs above $136/bbl

After falling for two consecutive sessions, energy prices rebounded June 11 after the US EIA reported the fourth consecutive large reduction of US crude inventories in the week ended June 6.

Sam Fletcher
Senior Writer

HOUSTON, June 12 -- After falling for two consecutive sessions, energy prices rebounded June 11 after the Energy Information Administration reported the fourth consecutive large reduction of US crude inventories in the week ended June 6.

"Oil climbed more than $5/bbl yesterday on lower US stockpiles, and traders may be selling contracts to lock in gains," said analysts at Pritchard Capital Partners LLC, New Orleans.

EIA said commercial US crude inventories fell 4.6 million bbl to 302.2 million bbl, well below Wall Street's consensus of a 1 million bbl drop. Gasoline stocks increased 1 million bbl to 210.1 million bbl during the same period. Distillate fuel inventories climbed by 2.3 million bbl to 114 million bbl (OGJ Online, June 11, 2008).

Analysts in the Houston office of Raymond James & Associates Inc. said, "These large crude draws come at a time of year when the US typically builds inventory." However, oil was trading at lower prices premarket on June 12 "with traders focusing on the strengthening US dollar." The analysts said, "The dollar has gained three out of the last four trading sessions against the euro on speculation that the Fed might be contemplating raising interest rates to combat inflation."

The Commerce Department reported June 11 that retail sales soared 1% last month, the biggest increase since November. The May increase was double what economists had anticipated, and credited a major boost to the economy from the $50 million in economic stimulus payments the government sent out in May.

However, Olivier Jakob at Petromatrix, Zug, Switzerland, said the latest EIA report showed overall US petroleum stocks unchanged for the third week in a row "as crude stocks are transformed into product stocks." Jakob said, "Of the 4.6 million bbl crude stock draw, 1.9 million bbl was in the discounted Petroleum Administration for Defense District (PADD) 5 [on the West Coast] but 500,000 bbl were [drawn] in Cushing, Okla., and 3.6 million bbl [were drawn] in the US Gulf, which continues to draw week after week. As part of the explanation for the low crude imports into the US Gulf and the resulting low stocks, we can offer the practical explanation of Tropical Storm Arthur that had closed the Mexican export ports June 1-3."

Jakob said, "The more philosophical question is what are the crude oil stock levels that the industry is willing to hold in the Gulf [of Mexico area] when it considers the financing cost of such, the fact that the Strategic Petroleum Reserve will be released on the first storm disruption, and overall demand in the US is down on the 4-week average by 570,000 b/d from last year and at the lowest level since 2003."

Meanwhile, the International Energy Agency said it will attend the June 22 meeting of representatives of oil producing and consuming countries in Jeddah, Saudi Arabia (OGJ Online, June 11, 2008). "These high prices are not sustainable and jeopardize economic growth globally. The impact is especially acute in developing countries," said IEA Executive Director Nobuo Tanaka.

In other news, Venezuelan President Hugo Chavez warned that world oil prices could reach $200/bbl. He said, however, that $100/bbl would be a fair price.

The European Commission has accused German gas giant E.On AG and Paris-based Gaz de France of illegally agreeing to stay out of each other's home market. If found guilty of violating EU rules against restrictive business practices, the two large companies face hefty fines.

Energy prices
The July contract for benchmark US sweet, light crudes jumped by $5.07 to $136.38/bbl June 11 on the New York Mercantile Exchange. The August contract gained $5.12 to $136.98/bbl. On the US spot market, West Texas Intermediate at Cushing was up $5.07 to $136.38/bbl. Heating oil for July delivery advanced 16.24¢ to $3.97/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) increased 14.65¢ to $3.47/gal.

The July natural gas contract escalated by 22.5¢ to $12.66/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 18.5¢ to $12.52/MMbtu. EIA reported the injection of 80 bcf of gas into US storage during the week ended June 6. US gas storage now exceeds 1.89 tcf, down 343 bcf from the same period a year ago and 19 bcf below the 5-year average. The latest injection was below the Wall Street consensus of 91-93 bcf as a result of declining Canadian imports and "the swing of liquefied natural gas cargoes to the Asian and European markets," said Raymond James analysts.

Pritchard Capital Partners said, "Surging crude oil or not, traders see the natural gas market confined to a trading range." Its analysts said, "The EIA [gas] inventory report will get close scrutiny from traders anxious to determine if any headway can be made against the supply deficit relative to last year."

In London, the July IPE contract for North Sea Brent crude gained $4 to $135.02/bbl. However, the June gas oil contract dropped $3.25 to $1,257.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes increased 22¢ to $128.87/bbl on June 11.

Contact Sam Fletcher at samf@ogjonline.com.

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