MARKET WATCH: Crude tops $66/bbl with record monthly gain

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 1 -- Crude prices continued climbing May 29 for the fifth consecutive session, with the front-month contract topping $66/bbl on the New York Mercantile Exchange.

The contract broke through the 200-day moving average and gained $4.64/bbl through the week on NYMEX "for the largest absolute monthly gain ever," said Olivier Jakob at Petromatrix, Zug, Switzerland. North Sea Brent increased a total $4.74/bbl in the same week. July heating oil was up $4.76/bbl on NYMEX while reformulated blend stock for oxygenate blending (RBOB) increased $3.55/bbl. Natural gas gained 5.5% over the week.

Jakob said, "Over the last 2 months it is the swings in short positions that have been driving the net speculative positions." However, he said, "The short covering potential has been reduced and for the rally to continue would necessitate some fresh positions to enter the market."

One reason for the rise in May oil prices was the biggest monthly decline this year of the US dollar against the euro. Also, consumer confidence in the US escalated more than was expected in May to the highest level since September.

On the other hand, the US Department of Commerce said although the US gross domestic product declined at a slower-than-expected rate in this year's first quarter, it contributed to the worst 6-month performance in 50 years.

In time, rising oil prices will encourage more drilling activity around the globe and also will make it more difficult for members of the Organization of Petroleum Exporting Countries to stick with their production quotas. "If global oil production rises dramatically, it could create headwinds for the current oil rally; however, it is difficult to determine how much of the current rally is driven by investors switching out of the dollar into commodities," said analysts at Pritchard Capital Partners LLC, New Orleans.

Gas outlook
Pritchard Capital Partners noted data from the US Energy Information Administration show gas production fell sequentially by 0.5% to 63.28 bcfd in March, but was up 1.37 bcfd from the same period in 2008. February natural gas production was revised down slightly to 63.58 bcfd. "Most were not expecting to see sequential decline until May or August," they said.

Pritchard Capital analysts expect the US rig count to trough at 800-850 units, followed by "a period of stabilization in which the rig count only modestly improves to the 850 to 900 range by the end of 2009." They said, "It is a much slower process logistically to hire back rigs than it is to release them and operators are unlikely to shoulder the day rates to rehire the same rigs on which they had already paid a substantial upfront fee to cancel term contracts."

They forecast an increase in the US rig count in the second half of 2010 to 950-1,000 units, climbing to 1,100-1,150 by the end of 2011. "We expect rigs drilling for oil may be among the first to go back to work, particularly in plays such as the Permian Basin and Bakken Shale," said Pritchard Capital analysts.

In Houston, analysts at Raymond James & Associates Inc. estimate available Haynesville takeaway pipeline capacity at 3 bcfd. "Assuming production from surrounding areas (Barnett, Cotton Valley, Bossier, etc.) increase in-line with market expectations, interstate pipeline constraints from the Haynesville should not be a material issue until beyond 2011," they said. "In the interim, we are keeping a close eye on gathering and treating capacity additions as a potential bottleneck."

A review of previously announced pipelines and current capacity commitments on new expansions indicates more than 3.1 bcfd of incremental capacity could be online by early 2011, all with access to the Perryville Hub in east Louisiana. Perryville should have the receipt capability to handle the influx of Haynesville and additional shale gas for the next couple of years. But beyond 2011 Perryville "could face delivery takeaway pipeline issues" if capacity is not added, said Raymond James analysts. They also noted, "Should increased production push storage levels near full capacity during fill season, the potential exists for regional natural gas prices to be pressured, the magnitude and timing of which remain uncertain at this point."

Energy prices
The July contract for benchmark US light, sweet crudes continued escalating, up $1.23 to $66.31/bbl May 29 on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., kept pace with the futures contract, up the same amount to the same price. The August crude contract on NYMEX gained $1.20 to $67.07/bbl. The expiring June heating oil contract rose 4.05¢ to $1.64/gal. The also expiring RBOB contract increased 2.05¢ to $1.95/gal.

However, the July natural gas contract dropped 12.2¢ to $3.84/MMbtu, ending a three-session rally on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 32.5¢ to $3.92/MMbtu.

In London, the July IPE contract for North Sea Brent crude was up $1.13 to $65.52/bbl. The June gas oil contract gained $18.50 to $523/tonne.

OPEC's office in Vienna was closed June 1, so no price update was available for its basket of 12 reference crudes.

Contact Sam Fletcher at [email protected].