MARKET WATCHJune crude price rebounds above $70/bbl

Sam Fletcher
Senior Writer

HOUSTON, May 8 -- After 2 days of sharp declines, the June crude contract again climbed above $70/bbl in the New York market May 5 as the US, UK, and France pushed the United Nations Security Council for a resolution demanding that Iran quit enriching uranium.

Thus last week ended the way it began, with crude futures prices rising on traders' fears of possible supply disrupts due to Iran's defiant stance on its nuclear program and continued unrest in Nigeria.

"In addition, Bolivia's move to nationalize its oil and natural gas assets raised concern that a wave of similar such actions throughout Latin America could negatively impact energy investment and ultimately oil supply," said Robert S. Morris, Banc of America Securities LLC, New York. "However, the momentum for oil prices turned around at midweek after an unexpected build in US crude oil and gasoline inventories was reported. At the same time, US gasoline demand for the past 4 weeks has been flat versus 1 year ago, although some of the data may be mired by the shift in inventories in preparation for the change in blending specifications, which is effective this week."

Market concerns remain
Analysts in the Houston office of Raymond James & Associates Inc. said May 8 that crude futures prices were likely to drift lower with reports that Iranian President Mahmoud Ahmedinejad is to send a letter to US President George W. Bush seeking a resolution of the standoff.

"Though not the olive branch that would resolve the deadlock, markets look at this as a diplomatic measure in the right direction. Moreover, gas prices at the pump are likely to ease this week as refiners get better with ethanol switching. We await the onset of the driving season to possibly reverse this trend, assuming consumers show enough heart to drive with the same enthusiasm as is usual," said Raymond James analysts.

Meanwhile, refining margins have spiked due to a 10% decline in gasoline inventories over the past 9 weeks and concerns that the switch from methyl tertiary butyl ether (MTBE) to ethanol as an oxygenate blend in reformulated gasoline would cause further supply problems, said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

Although US President George W. Bush called for lifting US tariffs on imported ethanol, Morris said, "This would be a contentious issue in Congress, and we believe it is unlikely anything will come of it. Thus, any supply disruptions or spikes in gasoline prices related to the switchover to ethanol-based from MTBE-based gasoline are likely to be at their worst this week. Subsequently, with US crude oil inventories at the highest level since May 1998, any further upside to oil prices near term is likely to be driven by geopolitical tensions, most notably by the nuclear stand-off with Tehran."

Energy prices
The June contract for benchmark US light, sweet crudes gained 25¢ to $70.19/bbl May 5 on the New York Mercantile Exchange, with the July contract up by 30¢ to $71.90/bbl. Gasoline for June delivery escalated by 4.6¢ to $2.04/gal on NYMEX. Heating oil for the same month increased by 1.84¢ to $1.96/gal.

The June natural gas contract lost 13.1¢ to $6.78/MMbtu in profit-taking on its earlier run up. "There is really not much evidence of new demand in the last several weeks, and lower prices are likely in the offing," said analysts at Enerfax Daily.

"Composite spot natural gas prices also retreated last week, due largely to weak seasonal cooling or heating load demand, the decline in oil prices and plentiful domestic natural gas storage inventories. This pullback occurred despite, in a reversal from the prior 2 weeks, a lower-than-consensus natural gas storage injection figure last week," said Morris.

In London, the May IPE contract for North Sea Brent crude fell by $2.36 to $70.29/bbl. The May contract for gas oil dropped $19.75 to $614.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crude prices sank by $1.04 to $65.06/bbl on May 5. OPEC's basket price has averaged $59.31/bbl so far this year, up from an annual average of $50.64/bbl in 2005.

Contact Sam Fletcher at [email protected].