MARKET WATCH: Market rallies; crude tops $60/bbl

The front-month oil contract topped $60/bbl in intraday trading May 12 but pulled back following an EIA prediction that the benchmark price will average $55/bbl for the rest of 2009 and $58/bbl in 2010.

May 13th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 13 -- The front-month crude contract on May 12 topped $60/bbl in intraday trading for the first time this year but pulled back following an Energy Information Administration prediction that the benchmark US oil price will average $55/bbl for the rest of 2009 and $58/bbl in 2010.

In New Orleans, analysts at Pritchard Capital Partners LLC said the first leg of the crude price rally from a $35/bbl low was driven by perceived stabilization in the global economy and production cuts by the Organization of Petroleum Exporting Countries. However, they said, "The last week of the crude rally and commodities in general has been attributed to concerns regarding the dollar as investors remain concerned about the impact of the expected issuance of $1.7 trillion of US treasuries."

Crude and gas prices climbed without any support from market fundamentals, said analysts in the Houston office of Raymond James & Associates Inc. "News that Chinese refinery output increased in April overshadowed news that China's industrial (factory) output rose less than expected last month," they said.

In its latest monthly report, EIA projected a weaker oil market in 2009 as a result of large inventories, weak consumption, and higher than expected production. World oil consumption is now projected to fall 1.8 million b/d this year, 400,000 b/d below EIA's estimate last month.

The US agency reduced its prediction of OPEC oil production to 28.65 million b/d, down 130,000 b/d from its previous guess. It expects non-OPEC production to increase 100,000 b/d this year. US natural gas consumption is projected to decline by 1.9% this year and increase slightly in 2010. US marketed gas production will decline 1% in 2009 and 2.8% in 2010, said EIA. It predicts LNG imports will increase 43% to 500 bcfe in 2009 and 650 bcfe in 2010.

OPEC's outlook
OPEC said May 13 its basket of 12 reference crudes gained $4.42, or 10%, to an average $50.20/bbl in April. "Prices moved higher on improved sentiment over the economic recovery amid prosperous indicators. Equity market fluctuations, and the weakening US dollar prompted an influx of investment into the energy future," said OPEC officials in their latest monthly report. "This improvement came despite the persistent deterioration in demand." The average price of OPEC's basket increased 65¢ to $56.76/bbl on May 12.

OPEC reduced its forecast for world oil demand growth in 2009 by 200,000 b/d to 1.6 million b/d, due to continued deterioration of the world economy. "Global oil demand growth reached a record low at minus 2.4 million b/d in the first quarter," officials said.

OPEC expects demand for its crude to average 28.8 million b/d, down 2.2 million b/d from 2008.

"The Euro-zone slipped deeper into recession; as a result the forecast has been revised down by 1.2 percentage points for a decline of 4.2%. Despite some positive signs, the US is still expected to decline at a rate of 2.8%, down 0.2 [percentage points] from the previous forecast," said OPEC officials. "Growth expectations for China and India remain unchanged at 6.5% and 5%, respectively. In general, it remains to be seen whether the current positive momentum is sustainable and whether the measures taken by central banks and governments will be enough to support an economic recovery."

US inventories
EIA reported May 13 that commercial US crude inventories fell 4.7 million bbl to 370.6 million bbl in the week ended May 8. Wall Street analysts expected a 1 million bbl increase, while after the market closed May 12 the American Petroleum Institute estimated a 6.9 million bbl draw.

EIA said gasoline stocks dropped 4.1 million bbl to 208.3 million bbl during the same week, compared with Wall Street's consensus of no change. Distillate fuel inventories increased 1 million bbl to 147.5 million bbl, a little short of Wall Street's expectation of 1.3 million bbl increase.

Imports of crude into the US dropped 1.2 million b/d to 8.7 million b/d last week. The input of crude into US refineries fell 330,000 b/d to 14.4 million b/d with units operating at 83.7% of capacity. Gasoline production dropped to 8.7 million b/d, while distillate production decreased to 4.1 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said EIA regional data showed declining refinery utilization rates on the Gulf Coast. However, he said, "The data was mixed on the East Coast. Gasoline inventories declined 2.6 million bbl, with the decrease apparently due to reduced imports (609,000 b/d, the lowest weekly level since November). However, East Coast refinery utilization rates jumped up during the week (from 70% to 75%, according to our calculations), which could result in higher production in the coming weeks."

Natural gas
In Washington, DC, the American Gas Association said, "An overall review of current US gas supply shows a curve that is beginning to indicate a downward trend; however, most of the change has come in the form of import reductions from Canada. Domestic production declines will happen as time passes given reductions in drilling activity and budgets—that is a fact."

AGA officials said, "What is unknown is how rapidly the large volume market for industrial consumption of natural gas will rebound. With that said, many analysts believe that the market price for natural gas still has room at the bottom to fall given high storage inventories, lackluster demand, and a relatively strong supply position compared to potential summer demand."

May 12 on the New York Mercantile Exchange, the June natural gas contract jumped 14.7¢ to $4.45/MMbtu. On the US spot market, gas at Henry Hub, La., continued to climb, up 12¢ to $4.37/MMbtu.

Raymond James analysts said, "With expectations of oversupplied storage during the summer months, it continues to boggle our minds why natural gas is now trading over $4.50/Mcf."

Pritchard Capital Partners said, "Natural gas traded higher again on all major US delivery hubs; there were impressive gains across several of the hubs." They said, "Differentials across the various hubs appear to be converging on NYMEX natural gas pricing. Hubs are cash markets and are not trading markets as NYMEX is, and the drop in the differentials is the first sign that the shut-ins and rig count reductions are beginning to impact supply."

EIA projects the natural gas spot price at Henry Hub will average $4.06/Mcf this year, down from an average of $9.13/Mcf in 2008. In 2010 the price is expected to average $5.21/Mcf.

Energy prices
The June contract for benchmark US light, sweet crudes traded as high as $60.08/bbl May 12 before closing at $58.85/bbl, up 35¢ for the day on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., continued copying the future market, up the same amount to the same price. The July contract on NYMEX gained 30¢ to $59.71/bbl. Heating oil for June delivery increased 0.61¢ to $1.51/gal. However, the June contract for reformulated blend stock for oxygenate blending (RBOB) continued to slide, down 1.23¢ to $1.67/gal.

In London, the June IPE contract for North Sea Brent crude advanced 46¢ to $57.94/bbl. Gas oil for May was unchanged at $475.50/tonne.

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