MARKET WATCH: Natural gas tops $12/MMbtu

Having peaked above $12/MMbtu in intraday trading in three recent sessions, natural gas finally closed above that level June 3 on NYMEX, leaving the door open for possible advances, analysts say.

Sam Fletcher
Senior Writer

HOUSTON, June 4 -- Having peaked above $12/MMbtu in intraday trading in three recent sessions, natural gas finally closed above that level June 3 on the New York Mercantile Exchange, leaving the door open for possible advances, analysts say.

However, crude prices fell below $125/bbl to the lowest level in 3 weeks as the US dollar rallied against other top currencies.

The surge in natural gas prices was "attributed to hotter temperatures in various regions of the US, a percolating tropical weather environment, and continued fund short-covering [in the commodities market]. Forecasters see conditions in place for an active tropical season," said analysts at Pritchard Capital Partners LLC, New Orleans.

Meanwhile, KBC Process Technology Ltd. in the UK said, "With high oil prices damaging many economies around the world, there has been much recrimination regarding responsibility. It is perhaps not surprising that many within the financial sector and those involved with futures markets have sought to blame tight oil market fundamentals rather than speculation."

However, KBC analysts said: "Investment in commodity indexes including oil has swelled in little more than 2 years from $70 billion to $235 billion by mid-April, according to Lehman Bros. Moreover, oil futures markets provide for outright price discovery, with the NYMEX crude contract alone trading eight times the daily amount of global crude oil production. Only a small part of the latter is traded on the spot market with relatively small shifts in the relationship between prices for these wet barrels and the paper barrels traded on futures markets."

KBC analysts charged, "Over a period of several years, the oil industry has sadly surrendered responsibility for the outright price of oil to the financial sector. Oil futures prices are determined by a complex range of factors, many of which are extraneous to the oil industry. In the recent past, an important factor in 'investor' inflows to oil futures markets, helping to drive oil prices to higher levels, has been quite simply that at a time of weakness in equities, oil has been seen as a more lucrative investment for large cash amounts."

The analysts added, "The stubborn refusal of the Organization of Petroleum Exporting Countries to respond to higher prices by raising output (until the recent belated Saudi response) has been an important factor in helping speculators to push prices higher, but the cartel rightly claims that the physical oil markets are (just) adequately supplied. The best recent evidence of this, before the latest surge in prices, was the very large crude carrier fleet assembled by Iran to store up to 28 million bbl of unsold crude oil close to Kharg Island, due to reduced demand from global refiners during the maintenance season."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "One of the immediate impacts of all the Commodity Futures Trading Commission agitation is that it should push traders across the commodity spectrum that had been using the swap loophole to trade over their limit to 'clean up' their books. The recently voted Farm Bill could also provide a further incentive to clean up as the bill will make for higher civil penalties in cases where the CFTC rules are violated."

While the CFTC is in the initial information-gathering stage of its investigation of possible price manipulation, it "is clearly being pressured" to regulate index positions more, Jakob said. "Pension funds that are considering investing in commodity indices will need to account a 'system risk' premium in their return estimate. In the meantime, it could actually push the pension funds that already had voted for the commodity allocations to accelerate the buying before it is too late."

US inventories
The Energy Information Administration reported June 4 another sizeable drop in commercial US crude inventories, down 4.8 million bbl to 306.8 million bbl in the week ended May 30. Gasoline stocks climbed 2.9 million bbl to 209.1 million bbl in the same period. Distillate fuel inventories increased 2.3 million bbl to 111.7 million bbl. Propane and propylene inventories were up 2.3 million bbl, to 38 million bbl.

Imports of crude into the US increased by 827,000 b/d to 9.8 million b/d in that same week. The input of crude into US refineries increased by 183,000 b/d to 15.5 million b/d with units operating at 89.7% of capacity. Gasoline production increased to 9.1 million b/d. Distillate fuel production increased to 4.5 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said refined product inventories (gasoline, distillates, and jet fuel) increased by 5.4 million bbl, or 1.5%, as refiners ramped up production due to the recent increases to refining margins. However, a sustained improvement in refining margins "is unlikely to occur absent an increase in demand, which has a low probability of occurring in a $120/bbl crude oil price environment," he said.

Energy prices
The July contract for benchmark US light, sweet crudes dropped $3.45 to $124.31/bbl June 3 on NYMEX. The August contract lost $3.35 to $124.70/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $3.45 to $124.31/bbl. Heating oil for July delivery fell 8.24¢ to $3.64/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) declined by 3.82¢ to $3.25/gal.

The June natural gas contract, however, escalated by 25.2¢ to $12.22/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 37.5¢ to $12.28/MMbtu. However, gas prices were lower in early trading June 4 after Enterprise Products Partners LP said it completed repairs to its Independence Trail pipeline and the Independence Hub is returning to operations as the system is tested. The Hub is expected to operate at reduced rates until it builds to full capacity of 1 bcfd, with an effective run rate of 800-850 MMcfd by mid-June. "This news should remove some of the upward pressure we have seen on domestic gas prices," said Pritchard Capital analysts.

In London, the July IPE contract for North Sea Brent crude lost $3.44 to $124.58/bbl. The June gas oil contract dropped $11 to $1,182/tonne.

The average price for OPEC's basket of 13 reference crudes was down 41¢ to $121.69 on June 3.

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