MARKET WATCH: Crude price tops $65/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 29 -- Energy prices surged May 28 with crude climbing above $65/bbl to a new 6-month high in the New York market after the Organization of Petroleum Exporting Countries decided in a brief meeting to maintain its 24.85 million bbl production ceiling for the 11 members other than Iraq.

An unexpected large draw from US crude inventories and indication of rising demand for gasoline also helped boost energy prices.

Natural gas climbed within a few cents of $4/MMbtu after the Energy Information Administration reported a smaller than expected build in gas storage for the week ended May 22 (OGJ Online, May 28, 2009). The agency also revised existing May inventories down by a total of 9 bcf.

"It appears the market is starting to realize that the forward natural gas curve is a more accurate prediction of where natural gas is headed," said analysts at Pritchard Capital Partners LLC, New Orleans. The front-month July gas contract rallied 8.7%, but the contract for June 2010 was up only 3.3% to $6.07/Mcf, they noted. A further drop in the US rig count "should add further upside…as it would be evidence we will see a supply response sooner rather than later," the analysts said.

However, analysts in the Houston office of Raymond James & Associates Inc. said, "While bullish on the margin, the latest natural gas inventory figures still look ugly from a historical perspective with inventories bumping up against the 5-year high. We remain skeptical regarding the recent move by both commodities and energy equities."

Prices for both oil and gas continued to climb in early trading May 29, the last trading day of the month. "If things are left unchanged at the close [of the trading session], then May 2009 will print in absolute terms the highest monthly gains ever for West Texas Intermediate, beating by a few cents the month of May 2008," said Olivier Jakob at Petromatrix, Zug, Switzerland.

US oil inventories
The EIA said commercial US benchmark crude inventories fell 5.4 million bbl to 363.1 million bbl in the week ended May 22. It was the third consecutive weekly decline. However, Jakob noted, part of the crude draw is "potentially linked" to bad weather that closed Louisiana Offshore Oil Port on May 22-23.

In the week before the Memorial holiday start of the summer driving season, gasoline inventories declined by 600,000 bbl to 203.4 million bbl. Distillate fuel inventories increased 300,000 bbl to 148.4 million bbl (OGJ Online, May 28, 2009).

Implied demand for gasoline jumped by 300,000 bbl to 9.5 million bbl, a level last seen in August 2007. "And this was despite a 1 million bbl increase in gasoline imports and a much higher refinery utilization rate. Some may point to the higher implied gasoline demand as further evidence of a rebounding or stabilizing economy," Pritchard Capital analysts said.

However, Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, questioned, "Was this a 1-week Memorial Day rise or a recurring trend? We suspect gasoline consumption will not be sustained at these levels, and given the large jump in gasoline production last week, to 9.38 million b/d (the highest weekly total since August 2008), gasoline inventories could be on the rise in the coming weeks. This could place downward pressure on gasoline margins, which have been strong of late."

Despite continuous draws on crude and gasoline stocks in May, Jakob said, "The overall stocks of petroleum in the US remain absolutely unchanged for the third week in a row." The undefined "Other Oils" category in EIA data "has been continuously building stocks as gasoline has been drawing stocks and is now at an historic high" up 15.8 million bbl over the last 4 weeks," he said.

OPEC's meeting
At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said, "To all intents and purposes OPEC's meeting was over before it started following the widely reported statement…by Saudi Arabia's oil minister [Ali al-Naimi] that the world economy was showing sufficient signs of recovery to be able to cope with oil prices in the range of $75-$80/bbl."

Most independent analysts disagree with al-Naimi "level of confidence," however. "We believe that in 2009 world oil demand will decline by 1.9 million b/d vs. 2008 and our early estimate for 2010 shows a further decline of 300,000 b/d and that world oil demand in 2010 will be back to the level seen in 2005," said KBC analysts.

However, just because $75/bbl oil is a minority view held by a few analysts "does not mean that it is not going to happen," said Paul Horsnell, a managing director and head of commodities research at Barclays Capital in London. "We expect prices to move above $75, and potentially fairly rapidly, as the market's fear of economic discontinuities abates further," he said.

In a press conference after the meeting, OPEC officials "skillfully dodged the question of whether or not greater quota compliance would be sought now that prices had risen above $60/bbl sooner than expected," said KBC analysts. "So we can assume that in the current climate quota compliance is no longer a serious issue, as long of course as it does not seriously deteriorate," they said. The analysts added, "We understand that there was no discussion of…the real level of oil production in Venezuela. There is a gap of 600,000 b/d between widely cited independent estimates and higher numbers published officially by Venezuela. But a rising tide of oil prices floats all boats, and this issue can wait for another day."

The latest figures on US imports of crude show "Saudi Arabia is taking seriously its role as a swing supplier," said Jakob. "US imports of Saudi crude oil in March went below the 1 million b/d mark for the first time since 1990 and were at the lowest level since November 1988. In February and March, US imports of Saudi crude oil were 525,000 b/d lower than a year ago, but that was not lost to all as fellow OPEC member Angola shipped 300,000 b/d more crude to the US than a year ago. Alert OPEC watchers will have observed that Angola is not really respecting its quota and [is] arguing that it deserves a higher output limit," he said.

The average price for OPEC's basket of 12 reference crudes climbed $1.02 to $61.77/bbl on May 28.

Energy prices
The July contract for benchmark US light, sweet crudes escalated by $1.63 to $65.08/bbl May 28 on the New York Mercantile Exchange, marking four consecutive sessions of gains. On the US spot market, WTI at Cushing, Okla., matched the front-month futures contract, up the same amount to the same price. The August crude contract gained $1.71 to $65.87/bbl on NYMEX.

Heating oil for June delivery bumped up 3.97¢ to $1.60/gal. The June contract for reformulated blend stock for oxygenate blending (RBOB) increased 1.88¢ to $1.91/gal. The June contracts for both products were scheduled to expire at the close of regular trading May 29.

The new front-month July contract for natural gas shot up 31.9¢ to $3.96/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 10.5¢ to $3.60/MMbtu.

In London, the July IPE contract for North Sea Brent crude was up $1.89 to $64.39/bbl. Gas oil for June advanced $17 to $505.50/tonne.

Contact Sam Fletcher at [email protected].