MARKET WATCH: Crude tops $62/bbl to 6-month high

Energy prices continued to climb May 20 with the new front-month July crude contract climbing above $62/bbl on the New York futures market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 21 -- Energy prices continued to climb May 20 with the new front-month July crude contract climbing above $62/bbl on the New York futures market.

The price jump marked the first time since early November that a leading crude contract closed above $60/bbl. The previous front-month June contract pushed above that level a couple of times in recent intraday trading but fell back each time by closing. The July oil contract finished above $60/bbl on May 19 as the June contract expired at the close of trading, positioning it for a yet higher closing when it took the front-month position May 20.

The rally continued as the Energy Information Administration reported US crude inventories dropped 2.1 million bbl to 368.5 million bbl in the week ended May 15. Gasoline stocks fell 4.3 million bbl to a below-average 204 million bbl in the same period. Distillate fuel inventories increased 600,000 bbl to an above-average 148.1 million bbl (OGJ Online, May 20, 2009).

"While the recent data points have been encouraging (and suggest that the Organization of Petroleum Exporting Countries' cuts are making a difference), inventories are still well above the 5-year highs. Domestic natural gas inventories remain bloated as well, and the commodity is poised to move lower this summer as the market tests the domestic storage limit," said analysts in the Houston office of Raymond James & Associates Inc.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "On the 4 weeks average, crude oil supply is down as much as crude oil demand, and the discrepancy between crude oil and total product demand is maintained (product demand is down 2 million b/d vs. a year ago but crude demand is down only 500,000 b/d)."

He said, "Over the last 4 weeks stocks of gasoline have been reduced by 13.4 million bbl, but stocks of the unspecified "other oils" have increased by 13.7 million bbl, so we can not fully exclude that some of the gasoline stock draws are due to creative accounting of molecules."

In New Orleans, analysts at Pritchard Capital Partners LLC, noted crude imports into the US hovered near 8.7 million b/d for the second consecutive week, compared with imports of 9.7 million b/d a year ago. Reduced imports are a contributing factor but don't fully explain the drawdown of US crude inventories, they said. That raises the question of "where the imports that were coming to the US are now being shipped," the analysts said.

They observed refinery utilization fell 1.9% in the latest week, primarily due to major refinery outages. "As a result we actually converted less crude into refined product and had a larger draw in gasoline inventories," said Pritchard Capital Partners.

Natural gas outlook
Pritchard Capital analysts said use of natural gas by the power sector increased 3.6% in February from a year earlier while retail sales of electricity fell 6.3% in the same month, with industrial demand down 13.8% from a year ago. It was the "second largest percentage drop year over year this decade and the seventh consecutive month-over-month decline in sales," they said.

Earlier this week the front-month natural gas contract dropped below $4/Mcf on the New York market, which market bears saw as "a signal that the commodity may retest the recent lows of $3.15/Mcf or at least retrace a portion of last month's $1.20 surge," said Pritchard Capital analysts. Yet some gas producers expect "a production decline sooner as opposed to later in the year."

Pritchard Capital analysts reported, "Carrizo Oil & Gas Inc. said they are already seeing a dramatic decline in Barnett production, so to say production won't decline between now and yearend seems odd to them. New production from the Haynesville and Marcellus could offset a lot of the Barnett reduction in near term, but in other basins in the Rockies, the Gulf Coast (Wilcox, Yegua, Woodbine, Travis Peak, Hosston, and Cotton Valley), and the Permian, activity has effectively stopped." This, they said, "implies production outside of the Haynesville and Marcellus is going to crater. The recent rally in natural gas could be discounting this, [but] either way if production does not pick up, 2010 is starting to look like a great year for natural gas."

EIA reported the injection of 103 bcf of natural gas into US underground storage in the week ended May 15. That put working gas in storage at 2.1 tcf, up 514 bcf from year-ago levels and 387 bcf above the 5-year average.

Energy prices
The July contract for benchmark US sweet, light crudes escalated $1.94 to $62.04/bbl on the New York Mercantile Exchange. The August contract increased $1.81 to $62.62/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., jumped $2.37 to $62.02/bbl as it tried to get in step with the new front-month crude futures contract. Heating oil for June delivery gained 5.45¢ to $1.54/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) inched up by 0.3¢ but closed virtually unchanged at an average $1.81/gal.

Natural gas for June gained 5.6¢ to $3.97/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 17.5¢ to $3.80/MMbtu.

In London, the July IPE contract for North Sea Brent crude gained $1.67 to $60.59/bbl. The June gas oil contract was up $11.75 to $481.50/tonne.

The OPEC Secretariat was closed May 21, so there was no update on the average price basket of its 12 reference crudes.

Contact Sam Fletcher at samf@ogjonline.com.

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