MARKET WATCH: Energy prices dip, but market remains stable

Energy prices retreated May 11, with crude coming off a 6-month high to end a 3-day rally that raised the front-month contract 10% last week even with US inventories virtually at full capacity.

May 12th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 12 -- Energy prices retreated May 11, with crude coming off a 6-month high to end a 3-day rally that raised the front-month contract 10% last week even with US inventories virtually at full capacity.

Anticipation of a May 13 government report of yet another increase in oil stocks pulled down prices in that trading session. Nevertheless, prices rebounded as high as $60/bbl in early trading May 12 after China reported its crude imports escalated 13.6% in April from year-ago levels to 3.95 million b/d. A run-up in the US equity market and a weaker dollar also helped buoy oil prices. So far this year, the price of crude is up 34%, including a 76% jump from its lowest level in February.

In Houston, analysts at Raymond James & Associates Inc. said, "We continue to think that the recent energy rally has been a bit too much too soon. Additionally, it looks like both oil and domestic natural gas prices may have gotten ahead of the current fundamentals as well."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Despite global markets under some profit taking, the oil market managed to hold relatively well [in the May 11 session] and to gain during the open session of the [New York market]."

He said, "The flat price of crude oil has been recently trading in a strong correlation to the equities and for West Texas Intermediate to trade in isolation would require a shift from contango to backwardation. That is what the Organization of Petroleum Exporting Countries has been trying unsuccessfully to obtain, but we must take in account that over the last few days the WTI contango has been able to reduce sharply despite the roll of the indices."

Jakob said, "We are not in backwardation yet, but the trend on the front spread needs now to be monitored as closely as the trend on the Dow [Jones Industrial Average] and on the dollar index. Seasonally we are moving towards the months where gasoline demand will be the driver in the Atlantic Basin, where supply from the North Sea will be reduced for maintenance, and where WTI will start to price some hurricane risk. US crude oil stocks are still close to historical highs, but the sweet to sour composition of the Cushing[, Okla.] stocks will start to be under increased scrutiny if the overall US stocks start to level off."

Chavez seizes assets
Crude prices fell May 11 despite the move by Venezuela's President Hugo Chavez to grab assets of foreign oil service firms in Venezuela. The Venezuelan government seized El Furrial pipeline and the PIGAP II natural gas compression terminal, both owned by Williams Cos. Inc. In April, PIGAP II and El Furrial both sent default notices to their lone customer, Petroleos de Venezuela SA, because of lack of payment by the state-owned oil company.

Analysts at Pritchard Capital Partners LLC in New Orleans also cited news reports Venezuela ordered the seizure of a barge and tugboats from Tidewater Inc., "which has a total exposure of about 15 older boats with an average age of 28 years and book values from $200,000 to $300,000 each, or around $4 million in aggregate." The analysts said, "This is relatively immaterial to TDW, as the company has about 436 vessels in its fleet and $3 billion of assets on its balance sheet, and we thus view any sell-off on this news as a buying opportunity. In addition, we view yesterday's 6.8% decline in Helmerich & Payne Inc. as a buying opportunity, as Venezuela only accounted for less than 5% of [the company's] revenues, and we had no longer included any revenues from the 11 [H&P] rigs [in Venezuela] in forward earnings after the recently announced earnings report."

Pritchard Capital Partners said, "Obviously, the asset seizure is negative for all foreign companies that operate in Venezuela, but the story is a positive for the oil price as the asset seizures will deter foreign energy companies from working and investing in Venezuela, and this may ultimately lower Venezuelan crude production."

Energy prices
The June contract for benchmark US sweet, light crudes retreated 13¢ to $58.50/bbl May 11 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing lost the same amount to the same finish. The July crude contract was down 33¢ to $59.41/bbl on NYMEX. Heating oil for June delivery declined 1.75¢ to $1.50/gal. RBOB for the same month dropped 2.53¢ to $1.68/gal.

The June contract for natural gas dipped 0.9¢ to $4.30/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 8¢ to $4.25/MMbtu. "Although natural gas traded in a tight range for most of the trading day, natural gas showed strength on the regional hubs," said Pritchard Capital Partners. "Strength in the regional hubs generally signals that there are physical buyers in the market, and the price strength on each hub could be the first signs that the rig count and the shut-ins are starting to feed through to natural gas supply and drive up prices at each hub. Additionally, early in the year weakness at each of the hubs was attributed to an oversupply of Rockies natural gas that was being dumped across the market; this oversupply from the Rockies may now be extinguished."

They said, "Overall, positive price action at various regional hubs is indicative of some demand and that supply is starting to be impacted by rig count cuts and shut-ins—the lows in natural gas could be behind us."

In London, the June IPE contract for North Sea Brent lost 66¢ to $57.48/bbl. Gas oil for May dropped $1.50 to $475.50/tonne.

The average price for OPEC's basket of 12 benchmark crudes fell 24¢ to $56.11/bbl on May 11.

Contact Sam Fletcher at samf@ogjonline.com.

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