MARKET WATCH: Crude, product prices climb higher

Prices for oil and products climbed May 22, regaining some losses from the previous session when oil dropped from a 6-month high, as the US dollar fell to the lowest levels in months against the euro and UK pound.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 26 -- Prices for crude and petroleum products climbed May 22, regaining some of the losses from the previous session when oil dropped from a 6-month high, as the US dollar fell to the lowest levels in months against the euro and the UK pound.

"Support for higher oil prices also came from renewed violence in Nigeria and fires at Sunoco [Inc.]'s 175,000 b/d Marcus Hook, Pa., refinery and at Flint Hills Resources [LP]'s 288,000 b/d Corpus Christi, Tex., refinery. Yet more support for crude came from the announcement of the June loading programs for the North Sea indicating that production will be down by close to 200,000 b/d vs. May as annual field maintenance programs start," said analysts at KBC Market Services, a division of KBC Process Technology Ltd.

As markets reopened May 26 after the 3-day Memorial Day holiday, crude was down in early trading amid speculation the Organization of Petroleum Exporting Countries will not change current production quotas when ministers meet May 28 in Vienna. Natural gas also traded lower after dropping 15% the previous week. "We do not think that we have seen the bottom in gas prices yet as we still expect gas prices to fall below $2.50/Mcf this summer," said analysts in the Houston office of Raymond James & Associates Inc.

The front month contract for benchmark US crude closed above $60/bbl on the New York market last week for the first time this year. The July contract increased a total of $4.55/bbl, or 8%, during the week in New York while North Sea Brent for the same month was up $4.80/bbl to a 6-month high in the London market. "In products, June reformulated blend stock for oxygenate blending (RBOB) gained $6.17/bbl [in New York] but gains on heating oil were more moderate at $4.73/bbl. Natural gas, on the other hand, is going the opposite way than crude oil and was down 14.4% during the week," said Olivier Jakob at Petromatrix, Zug, Switzerland.

At the Centre for Global Energy Studies (CGES), London, analysts said, "The market seems to have shrugged off the economic gloom and reports that more than 70 tankers, most of them moored off the coasts of major oil-consuming countries, are holding 130 million bbl of oil in floating storage."

Oil prices in the $60/bbl range are "a reality, and the shape of the forward curve suggests that the market thinks prices will rise till the end of the year and into the distant future." CGES said, "Oil prices now reflect the balance of supply and demand for crude oil deliverable in June and July. They are not always right, but they cannot be ignored."

In New Orleans, analysts at Pritchard Capital Partners LLC said, "With gasoline inventories in the US 4.8% below year-ago levels and imports of gasoline trending lower as the market enters the heart of the driving season, the bias in oil prices looks positive. While April data for Asia look like growth cooled after considerable levels of sequential growth since January, we remain optimistic that economic activity will continue to improve sequentially leading to a tightening of the oil inventory picture with secondary storage levels declining throughout the third quarter."

The summer driving season in 2008 "was actually a stick-the-car-in-the-garage-season as sky-high prices, by US standards, and the onset of recession depressed the number of miles driven," said KBC analysts. This year KBC Market Services' preliminary forecast is third quarter gasoline demand essentially will be flat compared with the second quarter. "Even if the outlook is revised upwards in the next few weeks, which it might be, there is still very little possibility of a strong gasoline season, and even if there were, stocks are more than adequate," they said.

Meanwhile, little fundamental news to support the natural gas market is likely over the next 2-3 months "since the impact of sequential production declines (we believe declines likely started in May at least in the Barnett shale and several Rockies basins) will not be felt until August or September timeframes," said Pritchard Capital analysts. "Storage injections are likely to exceed year-ago levels until August and, potentially, some producers will be forced to shut in gas due to growth in resource play volumes while demand remains below year-ago levels in the industrial segment (industrial production and chemical industry trends showing very early signs of a recovery)," they said.

Pritchard Capital analysts said, "Bulls point to market share gains in the power sector as shown in [a recent Energy Information Administration report]. Bears point to the 'flood' of LNG that is expected to hit US terminals in the coming months as a primary reason for weak natural gas price, but sentiment is changing on LNG and some are starting to think this will not happen as new sources of LNG demand are now becoming more apparent. By year end we believe US deliverability could be 3 bcfd below December levels as production declines have a major impact on supplies."

OPEC outlook
Pritchard Capital Partners reported 25 of 27 analysts expect OPEC to make no adjustment in its quotas at its upcoming meeting. It is "somewhat surprising that consensus is so skewed towards unchanged production" since OPEC recently reduced its 2009 forecast of global oil demand by 1.3% to 84.03 million b/d, said Pritchard Capital analysts. However, with Venezuela in the process of nationalizing its oil production, it ultimately may do OPEC's work by taking more oil out of the market, they said.

The average price of OPEC's basket of 12 reference crudes is up 65% from the first of this year. It lost 18¢ to $58.57/bbl on May 25. So far this year, OPEC's basket price has averaged $46.55/bbl.

CGES said, "The world is still using much less oil than it did a year ago. In the first quarter of 2009, global oil demand was an estimated 3.6 million b/d down [from] the previous year, and in the current quarter we expect to record a year-on-year drop in demand of around 1.5 million b/d. However, it is beginning to look as if global oil consumption in the second quarter could turn out to be higher than it was in the first quarter, potentially bringing to an end a run of five consecutive quarters of falling global oil demand. This is not to say that the outlook for oil demand growth is good, but merely that it is less awful than it has been in recent months."

Energy prices
The July contract for benchmark US climbed 62¢ to $61.67/bbl May 22 on the New York Mercantile Exchange. The August contract increased 57¢ to $62.38/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 62¢ to $61.17/bbl, still trying to catch up with the new front month futures contract. Heating oil for June delivery inched up 0.86¢ to $1.54/gal on NYMEX. RBOB for the same month advanced 4.11¢ to $1.84/gal.

The June natural gas contract continued falling, down 8.8¢ to $3.52/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 24.5¢ to $3.41/MMbtu.

In London, the July IPE contract for North Sea Brent crude gained 85¢ to $60.78/bbl. The June gas oil contract was up $2.75 to $479.50/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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