MARKET WATCH: Reports of ample supplies send oil, gas down

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 4 -- The decline in crude prices accelerated June 3 following an unexpected gain in US inventories, and natural gas fell below $4/MMbtu in anticipation of a report of a continued build in gas storage.

Indeed, the Energy Information Administration reported June 4 a larger-than-expected injection of 124 bcf into US underground storage during the week ended May 29. There is now more than 2.3 tcf of working gas in storage, up 546 bcf from the same period last year and 423 bcf above the 5-year average.

The sell-off of gas ahead of that EIA report "most likely reflects concerns that the recent pattern of mild weather across the Eastern Seaboard will reduce natural gas consumption," said analysts at Pritchard Capital Partners LLC, New Orleans. However, they cited other EIA data indicating "the first signs of [gas] production declines from rig-count reductions and shut-ins." They also noted, "The high volatility seen in the past month in natural gas is similar to the volatility seen in crude when crude bottomed at $35/bbl 6 months ago; should natural gas bounce from the $3.50[/MMbtu] level for the third time, it would be indicative of a floor for natural gas."

The EIA earlier reported a jump of 2.9 million bbl in the US benchmark crude inventory to 366 million bbl, ending 3 consecutive weeks of declines. Gasoline stocks dipped 200,000 bbl to 203.2 million bbl. Distillate fuel inventory gained 1.6 million bbl to 150 million bbl (OGJ Online, June 3, 2009).

That report showed sustained weak demand for crude and related products, but the June 3 price drops were "more attributable" to increased value of the US dollar and a general sell-off of commodities, said Pritchard Capital analysts.

The drop in crude and product prices technically was "a very strong correction" but will prove nothing without "confirmation" from the June 4 market, said Olivier Jakob at Petromatrix, Zug, Switzerland. "The Bulls could afford a price retracement, and it is now up to the Bears to prove that they can find sufficient follow through selling between $65/bbl and $60/bbl, knowing that $60/bbl will be a strong line of support," he said.

Meanwhile, the oil market "is moving towards a transition period of very gradually improving demand, falling inventories, and prices closer to the desired range of key producers," said Paul Horsnell, a managing director and head of commodities research at Barclays Capital in London. Key producers are seeking a "Goldilocks range" of crude prices, "neither too hot nor too cold for both producers and consumers," he said. "It should be a range that maintains investment incentives and continuing macroeconomic equilibrium for producers, without creating too powerful a feedback effect on consumer economies, and without overly endangering oil's share of the longer-term energy mix."

That range likely to be $75-85/bbl, while $100/bbl "may be fairly close to the maximum level that could be accepted before a discussion came into play about the implementation of some direct price reduction policy," Horsnell said.

In other news, the ADP national employment index reported nonfarm private employment fell by 532,000 net jobs in May. Officials said it was the smallest loss since November.

Energy prices
The July contract for benchmark US contract for benchmark US sweet, light crudes fell $2.43 to $66.12/bbl June 3 on the New York Mercantile Exchange. The July contract dropped $2.34 to $67.09/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.43 to $66.12/bbl. Heating oil for July retreated 5.95¢ to $1.74/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) declined 2.36¢ to $1.90/gal.

Natural gas for the same month dropped 35.4¢ to $3.77/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 27¢, also to $3.77/MMbtu.

In London, the July IPE contract for North Sea Brent crude retreated $2.29 to $65.88/bbl. Gas oil for June dropped $13.75 to $542.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost 46¢ to $66.41/bbl on June 3.

Contact Sam Fletcher at [email protected].