MARKET WATCH: Crude prices rebound slightly

After losing more than $4/bbl in the prior session, crude futures regained a few cents in volatile trading May 30 in the New York market.

Jun 2nd, 2008

Sam Fletcher
Senior Writer

HOUSTON, June 2 -- After losing more than $4/bbl in the prior session, crude futures regained a few cents in volatile trading May 30 in the New York market.

That market still ended the week with a 3.7% loss on crude prices. For the month of May, however, the price of crude was 12% higher overall.

Concern about the June 1 official start of the 2008 hurricane season in the Atlantic Ocean and Gulf of Mexico also helped lift crude prices ahead of the weekend. The National Oceanic and Atmospheric Administration has predicted a 60-70% chance of 12-16 named storms, including 6-9 hurricanes, of which 2-5 will major hurricanes, this season.

"The hype regarding the start of the tropical season may not have been overblown," said analysts at Pritchard Capital Partners LLC, New Orleans. Tropical Storm Arthur—the first storm of the season—formed over the weekend and closed two Mexican oil ports before being downgraded and moving inland.

Analysts in the Houston office of Raymond James & Associates Inc. said June 2: "Now that the Bay of Campeche appears safe from Tropical Storm Arthur, crude is trading lower and has fallen nearly 7% since hitting an all-time high above $135[/bbl] less than 2 weeks ago. We still think the long-term supply and demand fundamentals are bullish for crude. The same cannot be said for natural gas prices, which are again trading up today. In the short term, we would not be surprised to see prices remain at lofty levels, although significant downside risk remains late this summer."

Price speculation
Raymond James analysts said, "Along with many commodities, crude and natural gas have been soaring as of late. Although 'speculators' could push crude prices either way in the short term, we think the long-term oil supply and demand fundamentals only get more bullish from here."

Olivier Jakob at Petromatrix, Zug, Switzerland, noted "profit taking patterns" during the May 29-30 trading sessions. The latest report from the Commodity Futures Trading Commission "clearly shows that the large speculative funds (professional speculators) have been undertaking massive profit taking by closing long positions, making for a decrease of net length of more than 40,000 contracts." Net speculative positions on front-month crude futures are now "at the lowest level of the year and below the levels of last year, 2006, and 2004," he said.

Jakob said, "The professional speculators have not been in a trend of adding to net long positions since West Texas Intermediate broke $100/bbl to the upside. The net length of professional speculators this year peaked at $105/bbl, they surfed the wave after that, but without adding, and took profit at $130-135/bbl. We would not be surprised to see that further length reduction has been undertaken in the second part of last week as the system risk, on commodity futures is increasing."

CFTC last week said it would increase surveillance of the futures market to determine if speculators really are responsible for the spike in energy costs as some claim. That, said Jakob, was "a first warning to the 'system risk,' and it is speculated that a second CFTC missile is to be launched this week…focused on an investigation over manipulation in the cotton market." However, he said, such a statement "could include as well some further references to increasing scrutiny on index positions."

Meanwhile, the US Federal Trade Commission will conduct a hearing June 3 on possible manipulation of oil markets.

Energy prices
The July contract for benchmark US light, sweet crudes traded at $124.67-128.30/bbl before settling at $127.35/bbl, up 73¢ May 30 on the New York Mercantile Exchange. The August contract gained 69¢ to $127.50/bbl. On the US spot market, WTI at Cushing, Okla., was up 73¢ to $127.36/bbl. The June contract for reformulated blend stock for oxygenate blending (RBOB) inched up 0.47¢ to $3.41/gal on NYMEX. However, heating oil for the same month dropped 2.87¢ to $3.66/gal.

The July natural gas contract escalated by 22.9¢ to $11.70/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., lost 26¢ to $11.48/MMbtu. Raymond James analysts said, "In the short term, prices could hover in the $10-12/Mcf range; however, we expect increasing supply to eventually push us towards record storage levels (if not in 2008, then in 2009). Although a warmer-than-normal summer could save gas prices from collapse, the downside risk causes us to forecast prices much lower than current futures prices. Either way, our revised outlook is considerably more bullish than our last one."

In London, the July IPE contract for North Sea Brent crude advanced 89¢ to $127.78/bbl. But the June gas oil contract took a dive, finishing down $40.75 to $1,187.75.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost $2.59 to $121.68/bbl on May 30.

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