MARKET WATCH: Oil, gas prices slip slightly

Prices for front-month crude and gas futures contracts slipped lower June 2, ending a strong rally for oil, on traders' fears of rising inventories and gains by the US dollar against European currencies.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 3 -- Prices for front-month crude and gas futures contracts slipped lower June 2, ending a strong rally for crude, on traders fears of increasing inventories and gains by the US dollar against European currencies.

Oil and gas prices continued to slip in early trading June 3.

Analysts at Pritchard Capital Partners LLC, New Orleans, said pricing for natural gas "on the physical hubs" diverged from the New York futures market "as 12 of the 14 major hubs actually traded higher on the day." The spread from the front-month gas contract the 12-month contract on the New York Mercantile Exchange "has contracted from 62% to 48% in the past week, and this spread should continue to contract as data begins to show impact of rig reductions and supply shut-ins," said Pritchard Capital Partners.

They also said: "Russia reported that natural gas production fell 14% month-on-month and 34% from May of last year. Lower Russian production is due to lower demand from Europe and Europeans drawing down storage rather than buying natural gas, but ultimately this is positive for US natural gas producers—if Europeans continue to drawdown storage, this alleviates some of the concern that excess LNG will end up at US terminals."

US inventories
After falling for 3 consecutive weeks, commercial US inventories of benchmark crude increased by 2.9 million bbl to 366 million bbl in the week ended May 29, said the Energy Information Administration. Total crude inventory is still above average for this time of year; Wall Street analysts were anticipating a continued decline, down 1.5 million bbl. Gasoline inventories dipped by 200,000 bbl to 203.2 million bbl, below average and in contrast to analysts' consensus for a 700,000 bbl increase. Distillate fuel stocks gained 1.6 million bbl to 150 million bbl, above average and above an expected increase of 900,000 bbl.

Imports of crude into the US increased by 868,000 b/d to 9.6 million b/d during the same week. For 4 weeks through May 29, US imports were down 643,000 b/d to an average 9 million b/d, compared with the same period in 2008.

The input of crude into US refineries was essentially unchanged at 14.7 million b/d in the latest week, with units operating at 86.3% capacity. Gasoline production rose to 8.8 million b/d, and distillate production increased to 4.1 million b/d.

After a large jump in gasoline demand in its previous report, due to Memorial Day driving, the latest EIA data returned to the "regular 2009 pattern of refiners attempting to match weak demand with lower supply," said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. "If the summer driving season does not materialize, with refinery utilization rates rising to their highest level since December 2008, supply could exceed demand, causing gasoline inventories to rise and refining margins to fall," he said.

Energy prices
The July contract for benchmark US light, sweet crudes hit $69.05 in intraday trading June 2 on NYMEX but slipped back to close at $68.55/bbl, down 3¢ for the day. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 3¢ to $68.55/bbl. The August crude contract gained 6¢ to $69.43/bbl on NYMEX. Heating oil for July delivery increased 2.14¢ to $1.80/gal. The July contract for reformulated blend stock for oxygenate blending (RBOB) inched up 0.09¢ to $1.93/gal.

The July natural gas contract dropped 12.9¢ to $4.12/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed by 14¢ to $4.04/MMbtu.

In London, the July IPE contract for North Sea Brent crude increased 20¢ to $68.17/bbl. Gas oil for June gained $18.25 to $556.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes advanced 52¢ to $66.87/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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