MARKET WATCH: Energy prices up Apr. 2 on hopes of economic improvement

Energy prices escalated Apr. 2 with front-month crude futures enjoying the biggest 1-day gain in weeks.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Apr. 3 -- Energy prices escalated Apr. 2 with front-month crude futures enjoying the biggest 1-day gain in weeks as the Group of 20—19 of the world's largest economies plus representatives from the European Union—agreed to fund $1 trillion through the International Monetary Fund and other institutions to ease the global economic crisis.

"The G20 summit in London pumped some much-needed optimism into the market . . . as the broader market rose for the third consecutive day and commodities surged. Energy stocks outperformed as the S&P 1500 Oil and Gas Exploration and Production index rose 5.1% and the Oil Service Index rose 5.6%," said analysts in the Houston office of Raymond James & Associates Inc.

They reported, "Oil led the way for commodities, climbing 8.8% on the combined broader market rally and weakening of the dollar. Oil traded as high as $53/bbl, above the $50/bbl level that the Organization of Petroleum Exporting Countries has publicly stated as an acceptable 2009 price. The recent rally in oil prices is clearly not based on near-term fundamentals as worldwide demand continues to fall and inventories are at record highs."

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "We believe that OPEC production cuts are improving the potential for an inventory reduction by the end of this year. We are therefore more confident that oil prices have established a floor. Nevertheless, we continue to believe that weak economic growth and slumping oil demand over the next few months will mean any rallies in the crude oil price will be unsustainable."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "A sustained rally above $55/bbl would need lower stock levels and a flat or backwardated time structure. For now we have neither."

US natural gas prices increased 2.4% on Apr. 2 after the Energy Information Administration reported gas inventories did not change in the week ended Mar. 27 despite 9 bcf of working gas being reclassified as base gas. Later in the day, data on monthly withdrawals of natural gas by area through January showed that "domestic supply likely started to roll over in December, a few months earlier than anticipated," said Raymond James. "Still, we expect to see full storage and lower prices later this summer."

Sieminski said, "US natural gas has been the worst performing commodity in terms of spot price performance in 2009, declining by approximately 30%. US natural gas production has proved remarkably robust in the face of lower prices. With US gross domestic product now expected to fall by almost 4%, and the current winter over, gas demand in 2009 is expected to fall by nearly 2.5%."

Energy markets were encouraged by reports US factory orders rose 1.8% in March, exceeding expectations of a 1.5% improvement. Additionally, manufacturing in China expanded for the first time in 6 months.

However, crude and natural gas prices were down in early trading Apr. 3 as the Labor Department reported the US unemployment rate jumped to 8.5% in March, the highest level since 1983 as 663,000 more jobs were eliminated. Since the start of the recession in December 2007, the US has lost a net total of 5.1 million jobs, almost two-thirds within the last 5 months.

Meanwhile, the US House and Senate overnight voted along party lines to approve budgets crafted to President Barack Obama's specifications on health care, energy, and education.

Energy prices
The May contract for benchmark US crude oil escalated $4.25 to $52.64/bbl Apr. 2 on the New York Mercantile Exchange. The June contract jumped $4.32 to $54.52/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $4.25 to $52.64/bbl. Heating oil for May delivery gained 9.33¢ to $1.44/gal on NYMEX. Reformulated blendstock for oxygenate blending (RBOB) for the same month climbed by 9.81¢ to $1.47/gal.

The May natural gas contract increased 8.7¢ to $3.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 9.5¢ to $3.68/MMbtu.

In London, the May IPE contract for North Sea Brent crude increased $4.31 to $52.75/bbl. The April gas oil contract jumped by $36.75 to $451/tonne.

The average price for OPEC's basket of 12 reference crudes climbed by $2.82 to $50/bbl on Apr. 2.

Contact Sam Fletcher at samf@ogjonline.com.

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