MARKET WATCH: Energy prices continue to rally

Energy prices continued to rally May 8 with crude closing above $58/bbl—the highest level this year—amid market optimism that economic ills may at last be easing and may even be on the road to recovery.

Sam Fletcher
Senior Writer

HOUSTON, May 11 -- Energy prices continued to rally May 8 with crude closing above $58/bbl—the highest level this year—amid market optimism that economic ills may at last be easing and may even be on the road to recovery.

Olivier Jakob at Petromatrix, Zug, Switzerland, said the front-month crude contract was up $5.43/bbl for the week in the New York market, with North Sea Brent gaining $5.29/bbl in the same period. "Reformulated blend stock for oxygenate blending (RBOB) was leading the complex and gained $7.90/bbl while heating oil was higher by $5.46/bbl," he said.

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "Values surged to levels not seen since the second week of November and $60/bbl is now in sight." They noted Dubai crude recently closed higher than either Brent or West Texas Intermediate, "a clear sign that the cutbacks in production of heavier, sourer barrels by Middle East…producers had an impact."

In New Orleans, analysts at Pritchard Capital Partners LLC, said, "The crude oil rally was supported by a slightly better than expected US nonfarm payrolls [down by 539,000 jobs vs. expectations of a 600,000 loss]. While the US unemployment rate was in-line at 8.9%—the highest level in 19 years—the report showed further signs that the US economy may have stabilized. Crude and commodities in general are showing strength as some investors believe that commodities may provide a better store of value than the US dollar and US Treasury bonds. This is particularly true considering the potential inflationary impact of the planned $1.7 trillion of US Treasury issuance expected over the next year."

US jobless claims were the lowest in 6 months. Meanwhile, Pritchard Capital analysts said, "Korean industrial production has shown signs of real strength, just 10% below 2008 levels although Japan is still 30% below early 2008 levels." US industrial production was still contracting in April, but the number was up for the fourth consecutive month. Japan, Korea, and Thailand showed industrial production gains in March.

In Houston, analysts at Raymond James & Associates Inc. said, "Lately, crude has basically tracked the equity markets, but most major broad market indices are trading higher premarket [on May 11] implying a return to prices based on fundamentals although it is probably too early to call."

The front-month natural gas contract was down in early trading May 11 after rallying 5.6% on May 8. "For the week natural gas advanced 22%, the largest weekly move since October 2006," said Pritchard Capital Partners. "Technically it appears that the downtrend that started in July has been broken. If this is indeed the bottom of the natural gas trend, it was marked by record negative sentiment from natural gas speculators."

Pritchard Capital analysts said, "The high level of short interest and the negative sentiment should continue to provide support for natural gas. Although industrial demand remains poor, most energy executives are predicting that the 55% rig count decline over the past 8 months will start to feed through to natural gas supply in the latter half of 2009. Furthermore, fears of the arrival of LNG to US shores are abating somewhat as the concern seems somewhat overdone particularly if the US and global economy are stabilizing." They added, "We could see a return to $6-7/Mcf gas prices in 2010."

However, they said, "Relative to crude, natural gas is at the lowest level we have seen in the past 12 years, as measured by WTI vs. Henry Hub spread…largely the result of growth in shale gas production in the US."

Energy prices
The June contract for benchmark US light, sweet crudes gained $1.92 to $58.63/bbl May 8 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., increased the same amount to the same price. The July crude contract was up $1.72 to $59.74/bbl on NYMEX. Heating oil for June delivery gained 3.32¢ to $1.52/gal. RBOB for the same month gained 4¢ to $1.71/gal.

The June contract for natural gas jumped 23¢ to $4.31/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 20.5¢ to $4.17/MMbtu.

In London, the June IPE contract for North Sea Brent rose $1.67 to $58.14/bbl. Gas oil for May lost 25¢ to $477/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 benchmark crudes gained 30¢ to $56.35/bbl.

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