MARKET WATCH: Crude pushes above $68/bbl; gas tops $4/MMbtu

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 2 -- After posting a record monthly gain in May, crude continued to soar through the sixth consecutive trading session on the New York market to more than $68/bbl—a 6-month high—while natural gas futures again bobbed above $4/MMbtu.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Natural gas was the leader of the pack…followed by heating oil." He earlier said gas posted "the largest absolute monthly gain ever" during May (OGJ Online, June 1, 2009).

In Houston, analysts at Raymond James & Associates Inc. reported, "Crude has now doubled off its yearly low, and recent strength has been driven by bullish inventory data."

However, analysts at Pritchard Capital Partners LLC, New Orleans, said the June 1 oil market "was driven by signs that Chinese manufacturing climbed for a third consecutive month and US industrial output contracted less than what was forecasted."

They noted, "Higher oil prices are leading to higher production." Production by the Organization of Petroleum Exporting Countries was up 405,000 b/d in May—"the biggest increase since 2007." OPEC production for that month averaged 28.15 million b/d, compared with its official quota of 24.85 million b/d for the 11 members except Iraq. "The largest OPEC increase came from Iran, which increased its output by 80,000 [b/d] and the largest decrease came form Venezuela where production fell 25,000 [b/d]," said Pritchard Capital Partners. Venezuela's production decline "may be completely attributable to President Hugo Chavez's efforts to nationalize Venezuelan oil production," they said.

Raymond James analysts said, "Saudi Arabia, the UAE, Kuwait, and Qatar were the only [capable] OPEC members that didn't cheat during May. Look for OPEC production to steadily increase as members try to take advantage of relatively strong oil prices." The average price for OPEC's basket of 12 reference crudes escalated by $2.64 to $66.35/bbl June 1. So far this year, OPEC's basket price has averaged $47.40/bbl.

Natural gas prices jumped June 1 despite expectations for another seasonally large injection into US storage in the June 3 report by the US Energy Information Administration. "Current inventories remain inflated from a historical perspective for both [oil and gas], and we would not be surprised to see a pullback on the horizon," said Raymond James analysts. Prices for both oil and gas were down in early trading June 2.

Pritchard Capital analysts said the gas price hike was "a delayed reaction" to EIA data indicating US gas production is starting to fall in response to shut-ins and the declining rig count. "From a technical standpoint the former high for the current front month contract was $4.71[/MMbtu]; a break above this level would be viewed positively by technical traders as it would represent a break in the pattern of lower lows and highs that natural gas has been stuck in for the past year," they said.

Energy prices
The July contract for benchmark US sweet, light crudes climbed $2.27 to $68.58/bbl June 1 on the New York Mercantile Exchange. The August contract advanced by $2.30 to $69.37/bbl. Subsequent months were in contango with consecutively higher prices to $74.80/bbl for January 2011. On the US spot market, West Texas Intermediate at Cushing, Okla., was up the same amount to the same price for NYMEX's July contract.

Heating oil for July popped up 9.89¢ to $1.78/gal on NYMEX. For the same month, the reformulated blend stock for oxygenate blending (RBOB) increased 2.9¢ to $1.92/gal. Jakob said, "There can be some expectations that consumer panic-hedging will bring support to the heating oil crack, and for now this is creating a sharp correction in the gasoline-to-heating oil premium. The physical stocks of distillates are however so high that if consumer hedging (buying) was to bring further support to the heating oil crack we would expect that surge to be rapidly met by refinery hedging (selling) as the physical barrels being produced with a stronger crack will need to be met by real immediate demand."

The July natural gas contract continued climbing, up 41.4¢ to $4.25/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 2¢ to $3.90/MMbtu.

In London, the July IPE contract for North Sea Brent crude increased $2.45 to $67.97/bbl. Gas oil for June gained $15.25 to $538.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.