MARKET WATCHCrude, gas futures prices rebound

April 18, 2006
The crude futures price pushed past $70/bbl to a record high closing for a front-month contract Apr. 17 in New York.

Sam Fletcher
Senior Writer

HOUSTON, Apr. 18 -- Spurred by Iran's deteriorating international relations and China's growing economy, the crude futures price pushed past $70/bbl to a record high closing for a front-month contract Apr. 17 in New York.

Analysts in the Houston office of Raymond James & Associates Inc. reported, "More smoke from Iran, [but] no fire yet. After declaring Iran a nuclear power last week, President Ahmadinejad said during an armed forces parade [Apr. 17] that any aggressor would regret attacking the Islamic Republic."

Other sources said recent commercial satellite imagery showed Iran has expanded underground nuclear sites in Isfahan and Natanz. Iran also is reported to be funding the Hamas terrorist group and to have promised financial aid to the Palestine Authority to offset funding that was withdrawn by the US and Europe.

Chinese President Hu Jintao said China's economy grew by 10.2% in the first quarter of this year, faster than previously forecast.

OPEC's outlook
Meanwhile, the Organization of Petroleum Exporting Countries said in its monthly oil market report for April that first quarter economic growth was strong in the US and China, the two largest consumer nations, while Japan's economy "decelerated" from its "remarkable pace" at the end of 2005. "Business sentiment in Europe has risen to high levels, but consumers remain cautious, and domestic demand has yet to record sustained growth. High rates of growth of world trade supported global manufacturing activity, especially in Asia," OPEC said.

The US economy is expected to grow 3.3% this year, according to OPEC economists. "Germany is experiencing a clear improvement in business sentiment, and the growth forecast for 2006 has been increased to 1.6%. The 2006 forecast for Japan is unchanged at 2.6%, but the forecasts for China and India have been raised to 9.1% and 7.4%, respectively. These upgrades are the main reason why the forecast of world GDP growth for 2006 has been raised to 4.5%," OPEC said.

However, it acknowledged, "Sustained higher energy prices may pose a risk to growth, especially in economies where consumer budgets face pressure from rising interest rates. The US is expected to slow later in 2006, and the world economy will become more dependent upon demand generated in Asia and Europe. In Asia the outlook is encouraging, particularly if the progress towards economic reform is maintained."

In Europe, however, OPEC said, "Political uncertainty may inhibit much-needed labor market restructuring, keeping unemployment at high levels and reinforcing the reluctance of households to spend."

Meantime, it said, "A combination of heavy refinery maintenance and larger-than-expected gasoline stock draws in the US over the last few weeks has raised the fear of a supply shortage over the driving season due to rising demand and the phasing out of methyl tertiary butyl ether from the gasoline pool. This shifted the focus of the market to gasoline trends, which lifted fuel prices across the globe."

That move helped product markets to "overwhelm their underlying benchmark crude costs, supporting refinery margins in March," OPEC said. It expects continued refinery maintenance through April and May in the US, together with the heavy turnaround schedule in Asia in the second quarter, to support prices for light product and refinery margins over the next months.

Global oil demand grew by 1 million b/d, or 1.2%, to 83.1 million b/d during 2005 and is expected to grow by 1.4 million b/d, or 1.7%, to 84.5 million b/d this year, OPEC said. The latest projected 2006 growth rate is marginally lower than OPEC's last monthly report as a result of "disappointing consumption in the US over the first 3 months of 2006, partially offset by an above-trend growth in Western Europe, especially in January," the group reported.

Non-OPEC supply of crude is expected to average 51.5 million b/d in 2006, up by 1.4 million b/d from 2005, OPEC said. Demand for OPEC crude is expected to average 28.5 million b/d, an upward revision of 100,000 b/d from March.

According to secondary sources, total OPEC crude production averaged 29.6 million b/d in March, down by 200,000 b/d from February.

Energy prices
The May contract for benchmark US sweet, light crudes jumped by $1.08 to a record high $70.40/bbl Apr. 17 on the New York Mercantile Exchange. The June contract was up $1.16 to $71.98/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., increased by $1.08 to $70.41/bbl. Gasoline for May delivery escalated by 6.18¢ to $2.17/gal on NYMEX. Heating oil for the same month rose by 3.98¢ to $2.02/gal.

The May natural gas contract shot up by 44.2¢ to $7.58/MMbtu, following the rising crude market. "Natural gas is on a tear, with prices up about $1/MMbtu since [Apr. 12]. Higher natural gas prices are a result of higher oil prices, which are solidly above $70/bbl. Geopolitical risks should keep oil prices at record highs for the foreseeable future, and bullish commodities will provide fodder to send energy stocks higher," said Raymond James analysts.

In London, the June IPE contract for North Sea Brent crude gained 89¢ to $71.46/bbl. Gas oil for May increased by $7.75 to $615.75/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by $1.20 to $65.02/bbl on Apr. 17. So far this year, OPEC's basket price has averaged $58.35/bbl, up from an average $50.64/bbl for all of 2005.

Contact Sam Fletcher at [email protected].