MARKET WATCH: Oil prices continue rally above $145/bbl

Sam Fletcher
Senior Writer

HOUSTON, July 7 -- Energy prices continued to rally July 3 with oil prices hitting record levels above $145/bbl just prior to the US Independence holiday weekend July 4-6.

Analysts in the Houston office of Raymond James & Associates Inc. reported, "Crude reached an all-time high [July 3] but is trading lower this morning as Iran's foreign minister hinted that negotiations between his homeland and western powers may be improving. Although we are bullish regarding crude's long-term prospects, prices could go either way in the short term."

Olivier Jakob at Petromatrix, Zug, Switzerland, reported the front-month crude contract finished last week $3.97/bbl higher than it started, setting another series of new record highs in its climb. North sea Brent crude escalated by $4.11/bbl. "Heating oil advanced by $5.54/bbl but reformulated blend stock for oxygenate blending (RBOB) is still trailing with gains of only $1.34/bbl during the week. Natural gas was up 2.8%," Jakob said.

Analysts at Pritchard Capital Partners LLC, New Orleans, reported, "Oil prices started out the week after July 4 with losses, though still remain at dizzying historical heights. They said front-month crude futures dropped below $143/bbl in early trading July 7, with heating oil futures shedding 10¢/gal. "Meanwhile, average retail fuel prices again crawled higher and hit new records. For gasoline, that was $4.108/gal. For diesel, it was $4.801/gal," the analysts said. "Diesel margins are still fetching attractive returns for refiners. But with physical gasoline selling at a loss to sweet crude values, some analysts warn run cuts may be forthcoming."

China has consistently accounted for at least 30% of global oil demand growth in recent years, said Raymond James analysts. Moreover, they said, "The fundamentals that are catalyzing this trend are not about to go away. With the reduction of petroleum subsidies in many Asian countries, consumers will have a greater incentive to practice prudent demand rationalization. This is not just healthy, but indeed it is necessary, because Chinese and other Asian oil demand must inevitably be constrained by the ability of the global oil market to provide the necessary supply. In other words, demand management is necessary to bring supply and demand into equilibrium. Regardless of the recent subsidy changes, we believe that Asia is positioned to remain the single largest driver of oil demand for the foreseeable future."

Analysts at KBC Market Services, a division of UK-based KBC Process Technology Ltd., said, "Despite US demand destruction and a round of domestic price increases in regulated markets across Asia, the first phase of demand-side responses, at $130/bbl, has been insufficient to assuage market concerns over tightness in supply. Meanwhile, no effective steps have been taken to limit speculation in oil futures markets. Saudi Arabia and others continue to state that high prices do not reflect the physical market. But outright prices are set in the futures market, not the physical market. The latter might be possible were Saudi Arabia prepared to consider selling a sizeable volume of Arab Light in the spot market on an outright price basis."

KBC analysts said, "Oil demand growth in May was lower than of late in both China (up just 2.3%) and India (up 4.1%). However, the level for China was impacted by shortages as the two main refiners, faced by mounting losses, reduced crude runs. Recent increases in domestic prices (to trim soaring subsidies) in China, India, Indonesia, Malaysia, Sri Lanka, Taiwan, and Bangladesh, are not expected to have a noticeable impact on oil demand growth in Asia. Meanwhile, flush with petrodollars, the heavily subsidized leading oil-producing countries continue to record oil demand growth of around 700,000 b/d."

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, reported, "US oil demand is likely to drop by 2% in 2008 and an additional 0.5% in 2009. However, fuel subsidies in parts of the non-OECD are helping to limit demand destruction in this part of the world."

Energy prices
The August contract for benchmark US light, sweet crudes set a new intraday trading record of $145.85/bbl before closing at $145.29/bbl, up $1.72 for the day July 3 on the New York Mercantile Exchange. The September contract also gained $1.72, to $145.86/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.71 to $145.28/bbl. Heating oil for August delivery climbed 3.45¢ to $4.11/gal on NYMEX. The August RBOB contract increased 2.16¢ to $3.57/gal.

The August natural gas contract escalated by 18.8¢ to $13.58/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 23¢ to $13.05/MMbtu. Pritchard Capital analysts said, "The few traders still working on the day before the long Independence Day holiday weekend responded bullishly [July 3] to news that only 85 bcf had been injected into storage for the week ended June 27."

Gas futures prices were supported by concerns about Tropical Storm Bertha in the eastern Atlantic. Bertha has since strengthened into the first hurricane of the Atlantic season. At 5 a.m. EDT on July 7, it was 845 miles east of the northern Leeward Islands, headed west-northwest at 17 mph. It is expected to strengthen in the next few days, but it is too soon to know if or where it might strike land. The first named storm this year, Arthur, formed in the Atlantic the day before the season officially started June 1 and soaked the Yucatan Peninsula.

Meanwhile, Sieminski said, "We would view $17/MMbtu as a more compatible gas price given the current level of crude oil prices. We would view this as easily achievable if the US summer is hotter than normal and the western Atlantic delivers an active hurricane season."

In London, the August IPE contract for North Sea Brent crude increased $1.82 to $146.08/bbl. The July gas oil contract jumped by $24.50 to $1,313/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes was up $3 to $140.73 on July 3 but dropped to $140.14/bbl on July 4. So far this year, OPEC's basket price has averaged $106.20/bbl.

Contact Sam Fletcher at [email protected].