MARKET WATCH: Oil prices climb, OPEC takes no action
Sam Fletcher
OGJ Senior Writer
HOUSTON, May 28 -- Energy prices continued to rise May 27 with crude topping $63/bbl ahead of the decision of ministers of the Organization of Petroleum Exporting Countries not to change production quotas at their May 28 meeting in Vienna.
OPEC's inaction was generally expected but helped bump crude above $64/bbl in intraday trading on the New York market. The group noted recent indicators that the global recession may bottom out this year. But they also noted large oil inventories, weak industrial production, and high unemployment still exist. OPEC's production ceiling is 24.85 million b/d for the 11 members other than Iraq. Although compliance remains relatively strong, OPEC members still have not fully implemented the 4.2 million b/d reduction they agreed on last year.
"A number of the traditional 'hawks' had called for [another] cut, either at this meeting or in the future," said analysts in the Houston office of Raymond James & Associates Inc. Given the obviously weak fundamentals, even Saudi Arabia's Oil Minister [Ali al-Naimi] believes the rise in oil prices is a function of optimism that the worst of the recession is now behind us, they said.
Rising oil prices likely were a factor in the group's decision. The average price for OPEC's basket of 12 reference crudes jumped by $2.04 to $60.75/bbl on May 27.
"Despite the broader market falling 2% and the dollar strengthening vs. the euro, oil prices continued to push higher [on May 27]," Raymond James analysts said. With higher oil prices, energy stocks outperformed the broader market as both the S&P 1500 Oil & Gas Exploration & Production subindustry index and the Oil Service Index fell less than 1%, said Raymond James analysts.
Olivier Jakob at Petromatrix, Zug, Switzerland, recently warned observers to "watch for a positive crossover of the 200-day moving average on West Texas Intermediate for the second part of this week." Jakob said, "That crossover occurred [May 27], and we think that it is not a coincidence that on that day WTI lost its recent correlation to the stock market. In the closing 30 minutes of the open session, WTI managed to rally while US equities were engaged in a sell-off."
Jakob said, "Many…trading momentum models have fixed position rules related to the 200-day moving average, and a crossover is a significant technical trigger that will override considerations of fundamentals or correlation to exogenous market."
On the natural gas market, prices were roughly flat on May 27. "Moderate temperatures and lower demand from the Memorial Day holiday have dominated the pricing scene," said Energy Solutions Inc., gas-buying advisors, Verona, Wis. "There just isn't any fundamentals to prompt a major price move higher, but then again it was just a few weeks ago when natural gas prices rallied over just a few days to climb back to $4.575/MMbtu. That price move higher was prompted by technical buying and the 'hope' that the economy was moving toward recovery mode. As economic data turned out to be not quite as rosy as many expected, the price rally fizzled."
Energy Solutions said lack of demand became evident as Southern California Gas Co. issued high-linepack operational flow orders (OFO) May 28. "A high-linepack OFO means more gas has been put into the pipeline than is being taken out or consumed. High-linepack can lead to dangerous pressure problems, and that is why the OFO was issued," said Energy Solutions analysts.
They said, "If crude oil continues to climb, it will prove somewhat difficult for natural gas prices to fall substantially below today's levels. Conversely, another downward slide in crude oil, could pull the front month natural gas [futures] contract to below $3/MMbtu.
US inventories
The Energy Information Administration said May 28 commercial US benchmark light, sweet crudes inventories fell 5.4 million bbl to 363.1 million bbl during the week ended May 22. Wall Street's consensus was for a much smaller decrease of 200,000 bbl. Nonetheless, crude inventories remain above average for this time of year. In that same week just prior to the Memorial Holiday start of the summer driving season, gasoline inventories declined by 600,000 bbl to 203.4 million bbl, below average for this time of year. The consensus was for a 1.3 million bbl reduction. Distillate fuel inventories increased 300,000 bbl to 148.4 million bbl, above average but below the expected 1 million bbl build.
Imports of crude into the US were down 13,000 b/d to 8.8 million b/d during that same week. In the 4 weeks through May 22, US crude imports averaged 8.8 million b/d, down 645,000 b/d from the same period a year ago. However, Jakob said, "Due to what could have been the first named [Gulf Coast tropical] storm of the [hurricane] season, the Louisiana Offshore Oil Port (LOOP) was closed [May 22-23], hence the relative low crude oil imports and stock draw in Petroleum Administration for Defense District 3 could be linked to the weather disruption."
As for gasoline, the most important data will be for the 2 weeks after the Memorial Day weekend "as they will give an indication into how much of the recent gasoline draws were final demand and how much were retailers filling up," Jakob said. Moreover, he said, "The similar week last year had very significant drawdowns so the year-on-year picture will not improve much in this [latest] report."
The input of crude into US refineries increased 624,000 b/d to 14.7 million b/d in the week ending May 22, with units operating at 85.1% of capacity. Gasoline production rose to 9.4 million b/d. Distillate fuel production fell to 4 million b/d.
EIA also reported the injection of 106 bcf of natural gas into US underground storage in the week ended May 22. That increased the working gas in storage to 2.2 tcf, 524 bcf above the same period a year ago and 393 bcf above the 5-year average.
Energy prices
The July contract for benchmark US sweet, light crudes gained $1 to $63.45/bbl May 27 on the New York Mercantile Exchange, the highest finish in nearly 7 months. It was the fifth consecutive trading session in which crude settled above $60/bbl. On the US spot market, WTI at Cushing, Okla., was back in lockstep with the front-month futures contract, up the same amount to the same price.
The August crude contract increased $1.06 to $64.16/bbl on NYMEX. Heating oil for June delivery rose 1.64¢ to $1.56/gal.The June contract for reformulated blend stock for oxygenate blending (RBOB) advanced 3.93¢ to $1.89/gal. The expiring June contract for natural gas inched up 0.1¢ to $3.54/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 8.5¢ to $3.49/MMbtu.
In London, the July IPE contract for North Sea Brent crude increased $1.26 to $62.50/bbl. The June gas oil contract gained $6.25 to $487.50/tonne.
Contact Sam Fletcher at [email protected].