MARKET WATCH: Crude market ends 4-day rally

The crude price dropped Apr. 27, ending a 4-day rally, but remained in the $50/bbl range on the New York market.

Apr 28th, 2009

Sam Fletcher
Senior Writer

HOUSTON, Apr. 28 -- The crude price dropped Apr. 27, ending a 4-day rally, but remained in the $50/bbl range on the New York market.

The price weakness continued in early trading Apr. 28, "driven by fears that a deadly outbreak of the swine flu would deliver a setback to the world economy, which had just begun to show signs of improvement," said analysts at Pritchard Capital Partners LLC in New Orleans. "Those fears were partially offset by US dollar strength and stabilizing equities markets." Analysts are watching closely to see if the 3-month trading range of $43-55/bbl holds, they said.

In Houston, analysts at Raymond James & Associates Inc. said, "As if depressed natural gas prices weren't enough, now we have swine flu and Houston flooding too." Heavy evening rains on Apr. 27 continued overnight, flooding portions of the Houston area and disrupting traffic along several freeways Apr. 28.

Meanwhile, Raymond James reported, "The World Health Organization raised its pandemic threat concern to level 4 (out of 6) over concerns of the spreading new flu virus and warned that it may not be containable. New cases have now been discovered on virtually every continent. Needless to say, the news is negatively impacting the travel and transport industries, including of course oil prices, as jet fuel and gasoline demand is expected to fall." Everything was priced lower in premarket trading "as stocks and commodity markets tried to assess the potential impact of swine flu on the global economy," analysts said.

Olivier Jakob at Petromatrix, Zug, Switzerland, noted, "It is difficult at this stage to have a proper read on the epidemy; the one thing that is sure is that it has become a media pandemic, and that does provide the risk to overtrade the disease." He said, "For now investors are not taking any risk and are reducing the exposure to commodities and are buying shares of pharmaceuticals instead. As the fear trade comes back into play, the dollar index is also rebounding from the line of support and could start to test again the resistance of 86.000."

Jakob said, "The US equities have been able to hold relatively well despite the Mexican flu but will have to fight overnight reports that Bank Of America and Citigroup might have been judged to be undercapitalized under the [government's economic] stress test. Further risk aversion will add more support to the dollar and logically pressure further the commodity complex."

Natural gas
In the natural gas market, Pritchard Capital Partners said, "LNG imports remain a concern. The call that seems to be getting more and more credence is that imports will exceed 3.5 bcfd this year while peaking at 5 bcfd by yearend, while March imports look to be 1.1 bcfd, and we are forecasting an increase to 1.7 bcfd by June."

They noted, "The European pipeline system has evolved to accommodate flows of natural gas from the Dutch North Sea, then the British North Sea, and then the Norwegian North Sea; there is also the flow of gas from Russia mainly through Germany moving south and west." As a result, they said, the only LNG sources that can flow gas into Europe "in a direction consistent with the way the pipeline system is generally constructed" are two terminals at the Isle of Grain and South Hook in the UK and the Zeebrugge terminal in Belgium.

Pritchard Capital analysts reasoned, "Pipeline imports into west Europe from either Norway or Russia will take precedence over LNG because gas buyers with access to those lines pay for the capacity of the pipelines, whether they use it or not, creating incentives to take the pipeline gas first." They concluded, "Europe is presently saturated with gas. Europe's ability to take LNG will diminish through summer." As a result, they said, "LNG has nowhere to go but to the US." They estimate US LNG imports can increase to 2.8-3 bcfd until mid-September.

Analyst at Pritchard Capital said, "The US rig count has declined by 53% since the early September rig count peak, but we estimate that US gas production is 2.7 bcfd above year ago levels for the first quarter.

Raymond James & Associates reported, "The only bright spot for the jack up market is Mexico, and on their earnings calls some companies suggested Petroleos Mexicanos could be in the market for anywhere from 5 to 10 additional rigs this year. Recently, rumors have circulated suggesting that Pemex's initial three-rig tender was to be cancelled. Channel checks indicate this is false—the tender is still on schedule, though one rig may be delayed until later in the year for technical reasons." However, they said, "Regardless of Pemex's demand, the market is grossly oversupplied and day rates are still headed lower."

James D. Crandell and James C. West at Barclays Capital Inc. in New York agreed, "Jack up utilization in the Gulf of Mexico continues to fall…. Of the 39 uncontracted rigs in the region, 19 are idle, 19 are cold-stacked, and one is in the shipyard. Worldwide offshore rig utilization increased 10 [basis points] to 82.7%."

West said day rates for high-specification rigs remain strong in Southeast Asia. "The North Sea spot market is currently weak, although activity is poised to improve during the summer season. Day rates for summer work appear to be consistent with last year's levels," he said. "However, the Gulf of Mexico shallow water market is deteriorating and utilization and day rates are under pressure. Deepwater day rates are mostly stable."

Barclay analysts reported, "The number of [US gas] wells drilled but not completed continues to rise, and we estimate there are over 1,000 in the Barnett shale, up from 500 at the start of the year. We view this as the creation of additional spare capacity in an already well oversupplied industry. This will further mute a recovery in gas prices."

US drilling permits totaled 4,257 over the past 4 weeks, up 4.9% from the prior 4 weeks' total, they said Apr. 28. The US well service rig count stood at 1,825 in March, down 122 rigs (6%) from the prior month for a 53% utilization rate. "Workover activity levels are down 26% vs. 2,457 active rigs last year," they said.

In other news, Saudi Arabia Finance Minister Aziz al-Assaf said his country is investing $400 billion over the next 5 years to increase oil production capacity in anticipation of a recovery in the global economy. That investment will be focused largely on infrastructure projects, he said. Saudi Arabia has cut oil production to less than 8 million b/d from 9.6 million b/d last July as the global recession erodes demand. Abu Dhabi's national oil company is expected to reduce its June exports by 18%.

Energy prices
The June contract for benchmark US sweet, light crudes traded as low as $48.01/bbl Apr. 27 before climbing back to close at $50.14/bbl, down $1.41 for the day on the New York Mercantile Exchange. The July crude contract lost $1.42 to $51.52/bbl.

On the US spot market, West Texas Intermediate at Cushing, Okla., was down 66¢ to $50.14/bbl. Heating oil for May delivery dropped 4.54¢ to $1.32/gal on NYMEX. The same month contract for reformulated blend stock for oxygenate blending (RBOB) decline 3.88¢ to $1.40/gal.

The May contract for natural gas was down 4.4¢ to $3.25/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 12¢ to $3.21/MMbtu.

In London, the June IPE contract for North Sea Brent dropped $1.35 to $50.32/bbl. Gas oil for May fell $12 to $421/tonne, wiping out its $12 gain in the previous session.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 benchmark crudes declined 76¢ to $49.21/bbl on Apr. 27.

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