MARKET WATCH: Crude price hits $126/bbl high

The benchmark crude futures price climbed above $126/bbl for the first time in intraday trading May 9 in the New York market.

Sam Fletcher
Senior Writer

HOUSTON, May 12 -- The benchmark crude futures price climbed above $126/bbl for the first time in intraday trading May 9 in the New York market on fears of an US confrontation with Venezuela over evidence that Venezuelan President Hugo Chavez has aided rebels in the attempted overthrow of the government of Colombia.

If the US imposes sanctions against Venezuela for aiding rebels in South America, Venezuela might cut off oil supplies to the US.

The front-month crude contract climbed by a total $9.64/bbl last week in the US futures market to more than double the price that it commanded a year ago. North Sea Brent crude gained $10.84/bbl last week. "Gasoline was matching the gains on crude oil with $9.66/bbl during the week, but no one could come close to the weekly gains of heating oil at $17.64/bbl," said Olivier Jakob at Petromatrix, Zug, Switzerland.

However, crude prices fell in early trading May 12 in New York, "amidst the first signs of demand destruction in emerging economies," said analysts in the Houston office of Raymond James & Associates Inc. "Chinese crude imports declined nearly 4% year-over-year, the first fall since October 2006, while Indian industrial production growth slowed to the lowest level since 2002 (only one data point). At $125/bbl, oil has risen farther and faster that even our bullish predictions. A modest pullback may actually be healthy for energy stocks, as broader economic concerns remain just as important to the long-term picture," the analysts said.

Jakob at Petromatrix said, "West Texas Intermediate is currently priced about $20/bbl above its 200-day correlation to the dollar, hence it can still afford some further weakening of the dollar. The gold-to-crude ratio remains at a multiyear low as metals are keeping a stronger relation to economics than oil is."

In other news, a bill pending in the US Senate would impose speculative-trading limits for WTI on the London markets, like those on the New York market. In 1999, the Commodity Futures Trading Commission permitted the old International Petroleum Exchange to place computer terminals for trading in the US without being subject to US regulation. However, IPE later was purchased by Intercontinental Exchange Inc. in Atlanta, but regulation was left to the UK Financial Services Authority. Now Congress is pushing for more US regulation of trades in all markets to ensure that speculators are not running up oil prices for their own benefit.

Meanwhile, Raymond James analysts said, "The surge in commodity prices has helped to drive increased investment in better technology and more equipment. The industry is clearly in an up-cycle as demand for more and better equipment continues to surge." At the recent annual Offshore Technology Conference in Houston, the analysts said, "We gathered from hundreds of companies that the common theme was that 'business was good and getting better.'"

The analysts said: "Another takeaway from the conference was that the improved application and evolution of oil field technologies was making a real difference for [exploration and production] economics. The most obvious example of this has been the emergence of the 'shale' plays in North America over the past 5 years. Operators are now using technologies that were mostly developed offshore decades ago to improve US land economics and unlock reservoirs that were previously uneconomic. These increases in efficiency through technological advances should keep activity oil field booming for years to come, even if oil and gas prices retreat from current levels. Finally, the oil patch has truly become global in nature as many of the represented oilfield companies were not based in the US. The Chinese in particular have made a strong push on the lower-end equipment side."

Energy prices
The June contract for benchmark US light, sweet crudes jumped to an intraday record of $126.27/bbl May 9 on the New York Mercantile Exchange before closing at a record $125.96/bbl, up $2.27 for the day. The July contract gained $2.39 to $126/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.27 to $125.97/bbl. Heating oil for June delivery climbed 12.62¢ to a record $3.64/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) advanced 6.34¢ to $3.20 gal.

The June natural gas contract climbed 27.4¢ to $11.54/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 3¢ to $11.29/MMbtu.

In London, the June IPE contract for North Sea Brent crude was up $2.56 to $125.40/bbl. The May gas oil contract soared by $38.75 to a record $1,192.50/tonne.

The office for the Organization of Petroleum Exporting Countries in Vienna was closed May 12 for a public holiday so new price information was not available.

Contact Sam Fletcher at samf@ogjonline.com.

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