MARKET WATCH: Crude continues climbing above $62/bbl in New York

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 27 -- Crude climbed to a new 6-month high above $62/bbl as a rally in the equity market pulled up the commodity from an earlier low.

The US dollar was gaining in early trading May 26 as investors poured money into that traditionally safe investment, but its value began to dive in midsession as investors switched to the equity market. Meanwhile in Nigeria, the Movement for the Emancipation of the Niger Delta claimed to have destroyed several major oil pipelines and put a Chevron facility out of operation.

Oil rallied off of early lows on a higher than expected consumer confidence reading of 54.9, up from an expected 42.6. It "added further momentum to belief that the worst of the economic downturn is behind us," said analysts at Pritchard Capital Partners LLC, New Orleans.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The Chevron outages in Nigeria, the foiled attack on a Total platform, narrow physical premiums as the North Sea enters in production maintenance were not enough to fully support the oil markets. West Texas Intermediate had finished last week on a relative strong note, but daily trading volume on [May 22] was at the lowest level of the year (even lower than on Jan. 2).Oil bulls were starting to lose confidence until the US consumers came to their rescue with…the highest read of consumer confidence in 8 month and the highest monthly gain since April 2003.

In Houston, analysts at Raymond James & Associates Inc. noted crude broke through its 200-day moving average to reach a 6-month high. However, they cautioned, "While the technical charts would indicate that a good support level has formed around $60/bbl, lack of demand continues to leave crude oil inventories at historically high levels."

Stocks were mixed in trading May 27 after General Motors Corp. confirmed too few bondholders were willing to take GM stock in payment of the company's debt. The firm has less than a week to complete a restructuring or else file for bankruptcy protection under Chapter 11.

Jakob said, "The part of the oil demand that is missing is not really the driving demand, but the industrial demand, hence if higher confidence starts to translate into higher consumption then that missing part of the oil demand equation could start to bottom. It's not an overnight process, but we are slowly stepping away from the Armageddonic views of last October. Despite the daily variations, the S&P 500 has been showing throughout the month of May a pronounced pattern of staying anchored near the start-of-the-year levels. The GM bankruptcy is probably coming in the next few days but that is by now as expected as was the Chrysler bankruptcy. The equity action this week will be important as it will make the print for the month. If things are left unchanged then it would be the third consecutive month of gains on the S&P 500."

Natural gas prices increased May 26 on the New York futures market "largely due to broader market optimism and a lift in crude oil prices," said Raymond James analysts. "However, in the coming months, it will be interesting to see how regional natural gas prices will respond to reduced pipeline capacity (Gulf Crossing offline June 1, Gulf South down in July) in the Midcontinent region.," they said.

Pritchard Capital Partners reported, "Some are predicting 1.5-2.5 bcfed of natural gas demand from utilities switching from coal to natural gas, but latest coal inventory data indicate that power generators have more than ample supplies of coal." They said, "Coal storage data showed that coal supplies at US power plants rose 1.4% last week to 174.7 million tons (64 days of supply) vs. 151.7 million tons for the same week in 2008."

OPEC to meet
The Organization of Petroleum Exporting Countries is to meet May 28 in Vienna, and it is widely expected there will be no adjustment of the group's production quotas. Saudi Arabian Oil Minister Ali al-Naimi said he sees no reason to cut production below the current output target of 24.8 million b/d for the 11 members, excluding Iraq. He said signs of recovering demand in Asia will likely raise oil prices to $75/bbl by yearend.

At the Centre for Global Energy Studies (CGES), London, analysts said, "There has been a considerable improvement in the price of oil from around $45/bbl at the time of the last OPEC meeting in March to the current level of over $61/bbl for Brent. OPEC's compliance with the agreed cuts slipped slightly in April, but has remained good enough to take oil supply below the expected level of demand for the rest of the year." They also expect oil prices to improve steadily through the rest of the year, "although Ali al-Naimi's hopes for an oil price of $75-80/bbl by the fourth quarter may be optimistic."

Analysts noted, "Although the overall level of compliance has been better than most expected possible, estimated at around 80% by OPEC and around 75% by the CGES, there have been one or two glaring exceptions to this rule. Iran, Venezuela, and Angola are all seen to have failed to rein in their production as promised, yet two of these countries have been at the forefront of calls for a further cut when OPEC meets."

Venezuela has long claimed secondary sources grossly underestimate its production, which it claims was well above 3 million b/d last September. It swears it is complying with the current quota. "Angola has reportedly asked [from] the starting point for its output cut to be altered, since the [base] September 2008 figure was abnormally low for the West African producer, affected by the shut-in for technical reasons of BP's Greater Plutonio project. Iran has offered no defense of, or denial of, its underperformance in making its currently-agreed output cuts," CGES reported.

OPEC's basket of 12 reference crudes gained 16¢ to $58.71/bbl on May 26. "This represents a more than 35% improvement in the OPEC basket price since OPEC last met in March and is likely to diffuse most of the concerns about current over-production, although the issue will undoubtedly remain a topic for discussion in Vienna," said CGES analysts.

Energy prices
The July contract for benchmark US sweet, light crudes traded as low as $59.53/bbl May 26 before climbing back to close at $62.45/bbl, up 78¢ for the day on the New York Mercantile Exchange. It is the highest closing since early November and the fourth consecutive session in which oil settled above $60/bbl. The August contract gained 72¢ to $63.10/bbl. On the US spot market, WTI at Cushing, Okla., advanced $1.28 to $62.45/bbl.

Heating oil for June inched up 0.73¢ to $1.55/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) increased 1.16¢ to $1.85/gal. Natural gas for the same month was up 2.2¢ to $3.54/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $3.41/MMbtu.

In London, the July IPE contract for North Sea Brent crude gained $1.03 to $61.24/bbl. The June gas oil contract advanced $1.50 to $481.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.