MARKET WATCH: Crude peaks at over $127/bbl

Crude futures peaked at new record above $127/bbl in intraday trading on the New York market May 16 despite claims by Saudi Arabia that it has increased its oil production a "sufficient" 300,000 b/d to 9.45 million b/d.

Sam Fletcher
Senior Writer

HOUSTON, May 19 -- Crude futures peaked at new record above $127/bbl in intraday trading on the New York market May 16 despite claims by Saudi Arabia that it has increased its oil production a "sufficient" 300,000 b/d to 9.45 million b/d.

Saudi officials said they made that move May 10 in response to requests from 50 customers, mostly from the US. Announcement of the increase came as US President George W. Bush visited Saudi Arabia to appeal for a production increase to bring down escalating energy prices. However, some members of the Organization of Petroleum Exporting Countries criticized Saudi Arabia for its unilateral increase, saying it should have gone through OPEC channels instead.

Analysts at Pritchard Capital Partners LLC, New Orleans, said average retail prices for gasoline and diesel in the US hit new highs as of May 19 at $3.794/gal for gasoline and $4.522/gal for diesel. "The rise is tied back to US spot markets, which headed into the weekend near or at record levels. Gulf Coast conventional gasoline prices closed the week over $3.10/gal for one of the few times in history, up roughly 25¢ in the past 2 weeks," they said.

Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., said US gasoline inventories are 8% above year-ago levels, "suggesting that [refiner's] margins will remain fairly modest through the summer driving season." He said, "The refiners who most need capital upgrades are the worst positioned for a sustained low margin environment."

Bernstein said most refiners experienced large losses in the first quarter for three main reasons. He said:

-- Rapidly rising crude oil costs squeezed refining margins, especially for "bottom-of-the-barrel" products.

-- Cash costs rose on increased maintenance and lower volumes.

-- Market prices encouraged refiners to maximize distillate production during the quarter.

Bernstein said, "Refiners can moderately increase their distillate yields, but this requires costly downtime. More significant upgrades can take billions of dollars and years to implement. Given capital upgrade costs and recent low margins, many of the more financially levered producers are likely reconsidering their capital spend plans."

Natural gas
Analysts in the Houston office of Raymond James & Associates Inc. said, "Gas built on the recent gains from the colder-than-normal end to winter, rallying another 7% to near $11/Mcf levels. At current levels of over $11/Mcf, natural gas is at its highest level since the hurricane-inspired rally in late 2005 and early 2006."

They said, "Clearly, lower winter-ending storage levels have substantially improved the outlook for summer gas prices. In fact, bullish year-over-year LNG comparisons should help support US natural prices through the end of June." However, Raymond James analysts cautioned, "We continue to see unprecedented growth in US gas production that should eventually overwhelm the US gas markets. This gas supply increase is driven by large independents and increasingly supported by growth from smaller private producers. According to our summer gas model (which assumes 10-year average weather throughout the summer), the US will be on the brink of having to shut in gas production. We continue to believe that there is a 50:50 chance that gas prices will collapse later in the summer. Regardless of weather, one certainty remains—unprecedented US gas production growth is showing little signs of slowing any time soon. This means an oversupplied gas market is still looming on the horizon. If it does not happen this summer, then it will likely show up next winter."

Energy prices
The June contract for benchmark US light, sweet crudes hit an intraday high of $127.82/bbl before closing at a record $126.29/bbl, up $2.17 May 16 on the New York Mercantile Exchange. The July contract escalated $2.19 to $126.04/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.18 to $126.30/bbl. The June contract for reformulated blend stock for oxygenate blending (RBOB) increased 5.77¢ to $3.22/gal on NYMEX. Heating oil for the same month gained 8.04¢ to $3.70/gal.

The June natural gas contract fell as low as $11.01/MMbtu in intraday trading before finishing at $11.09/MMbtu, down 30.5¢ on NYMEX. On the US spot market, gas at Henry Hub, La., lost 16¢ to $11.25/MMbtu.

In London, the new front-month July IPE contract for North Sea Brent crude gained $2.36 to $124.99/bbl. The June gas oil contract increased by $3.25 to $1,201.50/tonne.

The average price for OPEC's basket of 13 reference crudes was up 32¢ to $119.27/bbl on May 16. So far this year, OPEC's basket price has averaged $98.22/bbl.

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