MARKET WATCH: Energy prices rebound despite weak fundamentals

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 15 -- After posting losses in the previous session, energy prices generally revived slightly May 14 even as Paris-based International Energy Agency reduced its global demand outlook by 200,000 b/d to 83.2 million b/d in 2009, 3% below the 2008 level.

In addition to the IEA, the Organization of Petroleum Exporting Countries and the Energy Information Administration also recently predicted world oil demand this year "will post the largest decline since 1981," said analysts at Pritchard Capital Partners LLC, New Orleans.

"Recent strength in oil is contrary to storage and demand figures and all forecasts from the major energy authorities, and strength is attributed to the possibility of an economic rebound, OPEC supply cuts, outright purchase of hard assets (commodities) to hedge against the possible weakness [of the US dollar], and rumors that the Chinese are building crude inventories," they said. "Oil has rallied from $35/bbl to $60/bbl, or 71%, from the lows of the year, and a minor correction in crude would not be surprising, particularly as supply and demand fundamentals do not support recent price strength."

In Houston, analysts at Raymond James & Associates Inc. said, "Natural gas prices finished [May 14] down 1% in spite of a bullish EIA reported injection of 95 bcf [into US storage], which was below consensus estimates for a 98-99 bcf injection. While we agree that natural gas fundamentals have materially tightened in the past few months due to a dramatic fall-off in supply, from well noncompletion rather than price related shut-ins, we still believe there is substantial downside to gas prices this summer."

Market outlook
Pritchard Capital Partners noted several oil and gas exploration and production companies in the past week have turned to equity markets to raise capital through offerings of shares and senior notes. "Capital raising clearly indicates deleveraging is an ongoing theme across the sector, but positive market response to the most recent capital calls implies the market has priced shares so that capital raisings have been favorably received," analysts said.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "Oil analysts should stay focused on the potential for lower equity markets given the very strong positive correlation recently between oil prices and the Standard & Poor's 500 [an index of the 500 largest US companies]. We estimate that since September every 50-point move in the S&P 500 has been worth a $7/bbl move in the West Texas Intermediate crude price."

Olivier Jakob at Petromatrix, Zug, Switzerland, noted "a general consensus" that the recent oil rally "was purely a correlation to the equity markets and not linked to oil fundamentals." However, he said, "With industrial demand down more than driving demand and with the combination of a contango in distillates and a backwardation in gasoline, distillates is driving gasoline out of storage capacity, and this is then making the day-of-cover picture in gasoline not very different from previous years. This then makes gasoline still exposed, like in previous years, to supply glitches." Just this week, he said, reports of "a few cracker problems" had "a direct impact" on gasoline prices.

Meanwhile, Jakob said, "We will keep a Nigerian risk premium [on the price of crude] over the weekend. If nothing happens in Nigeria, we will then transfer it to a Middle-East premium next week as [Israel Prime Minister Binyamin] Netanyahu travels to Washington, DC, [on May 18]." He noted "leaks" earlier this month about the Israeli air force training on refueling missions between Israel and Gibraltar. He reported another leak this week "that Israel has rented MIG-29 fighter jets (the type owned by Iran) to train its pilots in 'dog-fights' against them; and it was leaked yesterday that the US Central Intelligence Agency director was sent to Jerusalem 2 weeks ago to gain reassurances that Israel would not strike Iran without a green light from Washington." Jakob said, "All of this is part of psychological warfare, but we have been there before, and we can't fully ignore it."

Energy prices
The June contract for benchmark US light, sweet crudes regained 60¢ to $58.62/bbl May 14 on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., was up the same amount to the same price. The July crude contract advanced 45¢ to $59.42/bbl on NYMEX. Heating oil for June inched up 0.47¢ but remained essentially unchanged at an average $1.49/gal. The June contract for reformulated blend stock for oxygenate blending (RBOB) continued to climb, up 3.49¢ to $1.72/gal.

Natural gas for the same month continued to retreat, down 4.1¢ to $4.29/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 31¢ to $4.08/MMbtu.

Pritchard Capital Partners noted, "The US natural gas hubs all dramatically underperformed NYMEX natural gas after showing signs of strength over the past week. The reason for the volatility in the various hubs is surprising as these markets are where the actually physical trade of natural gas takes place, and they are not 'trading' markets as NYMEX is."

In London, the June IPE contract for North Sea Brent crude added to its loss, down 65¢ to $56.69/bbl. Gas oil for the same month fell $11 to $472.75/tonne.

The average price for OPEC's basket of 12 reference crudes dropped $1.17 to $55.99/bbl on May 14.

Contact Sam Fletcher at [email protected].