MARKET WATCH: Crude hits 6-week high above $71/bbl

Front-month crude jumped to a 6-week high, closing above $71/bbl Aug. 3 on the New York market as the US dollar fell to its lowest level this year against the euro amid a flurry of promising economic signs.

Aug 4th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 4 – Front-month crude jumped to a 6-week high, closing above $71/bbl Aug. 3 on the New York market as the US dollar fell to its lowest level this year against the euro amid a flurry of promising economic signs.

The front-month natural gas contract jumped 9.9% to above $4/MMbtu. “The natural gas rally caught the market off guard as many were expecting the discussed unwind of the United States Natural Gas Fund to keep the price of natural gas suppressed. As of last week, UNG held 312,000 natural gas swaps through the IntercontinentalExchange Inc., and the exchange said they were considering adopting the 12,000-contract limit that the New York Mercantile Exchange limits natural gas speculators to,” said analysts at Pritchard Capital Partners LLC, New Orleans. “Natural gas has bounced off the $3.20/MMbtu level three times now, but always failed at $4.30/MMbtu. The contract is inching towards the $4.30/MMbtu level but will need to decisively break the $4.30/MMbtu level to sustain the current rally.”

The early surge in gas prices Aug. 3 was “likely the result of a large buy-stop order being triggered in low volume trading,” said analysts in the Houston office of Raymond James & Associates Inc. The gas price was down in early trading Aug. 4.

Meanwhile, the Institute for Supply Management's manufacturing index increased to 48.9 in July, the highest level since August 2008 and up from 44.8 in June. That report triggered a rally in the equity market, lifting the S&P 500 Index to a 9-month high above the 1,000 level. World equities climbed to a high for this year on indications of China’s strengthening economy

The National Association of Realtors reported Aug. 4 its Pending Home Sales Index rose for the fifth consecutive month, up 3.6% to 94.6 in the first such rally in 6 years.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Of course, it is exogenous variables that are driving the flat price of oil, and we are getting closer to a price level that can satisfy both producers (increased production or OPEC cheating) and consumers, but as long as the global markets remain supported as they are, the risk-reward of being medium-term short is narrowing as it is likely to be met by buying on the dips by asset managers.”

On a worldwide basis, Jakob said, “Gasoline demand is relatively stable and gasoline stocks on the lean side while distillate demand is poor and distillate stocks are on the very high side. The world is still missing the industrial demand for oil, but that could start to turn if manufacturing activity is indeed starting to pick-up.”

Jakob said, “In the US, car sales are improving. Ford made the headline with an increase of 2.4% from a year ago and while other automakers are still down on a year ago, they are mostly on a month-over-month rising trend. The US is however not alone. In France, July car sales were up 3.1% over a year ago, Italy up 6.16%, Spain down 10.9% but improving from the minus 16% of June. South Korea was higher by 11%, and China should again print a high number as GM is reporting its sales there up 78% from a year ago.” He said, “The increase in car sales is fueled by government subsidies, but it shows pent-up demand at a price and more importantly it will be drawing down inventories and start to turn the switches back on in the factories and increase demand for power, plastics, metals, etc.”

Pritchard Capital Partners said, “If the dollar continues to weaken, it is likely crude will test the $75/bbl level.” However, they noted, “Congressional hearings into the involvement of financial companies and speculators in the commodity complex start today; these hearings could lead to volatility in the commodity complex.”

Raymond James analysts reported the price of crude slipped lower in premarket trading Aug. 4 as the dollar strengthened and broad market indices traded lower. “While oil has surged 13% over the past 3 days of trading, a strong pullback today could imply that inventory levels are too high to sustain prices over $70/bbl. We will have to wait and see,” they said.

Meanwhile, China said it would maintain its fuel pricing system it introduced in 2008. “Chinese fuel prices are up 25% this year vs. the 70% gain in crude,” noted Pritchard Capital Partners. Lower petroleum prices in China will support Chinese demand, “and in the end a higher level of demand from the Chinese consumer may outweigh the impact of crude trading by speculators,” the analysts said.

Energy prices
The September contract for benchmark US sweet, light crudes traded as high as $72.20/bbl Aug. 3 on NYMEX before closing at $71.58/bbl, up $2.13 for the day. The October contract advanced $2.03 to $73.18/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $2.13 to $71.58/bbl. Heating oil for September delivery increased 3.88¢ to $1.87/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month gained 5.67¢ to $2.07/gal.

“RBOB gasoline is also testing the previous highs on a closing basis and very close to the $2.10/gal resistance,” said Jakob. “We remain concerned about the speculative length concentration in RBOB gasoline, which will make that market-driving commodity very reactive to the statistics to be published today and tomorrow.”

The September natural gas contract escalated by 37.8¢ to $4.03/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 12¢ to $3.49/MMbtu.

In London, the September IPE contract for North Sea Brent crude increased $1.85 to $73.55/bbl. Gas oil for August gained $21 to $591.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes jumped by $2.75 to $71.34/bbl on Aug. 3.

Contact Sam Fletcher at samf@ogjonline.com.

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