MARKET WATCH Crude futures price climbs above $73/bbl

Sam Fletcher
Senior Writer

HOUSTON, May 12 -- Crude futures prices continued climbing May 11, with the front-month contract topping $73/bbl on the New York market, the highest level in more than a week.

The June natural gas contract fell, however, after the Energy Information Administration reported the injection of 85 bcf into US underground storage during the week ended May 5. That was above the 75-79 bcf consensus of Wall Street analysts and up from injections of 53 bcf the previous week and 54 bcf in the same period a year ago.

Market factors
Increased injection of gas into storage indicates a drop in demand despite interim US temperatures that on a home heating basis were 50% warmer than a year ago, 31% warmer than the previous week, and 26.5% warmer than the 10-year average, with near record temperatures in the Southwest. US storage now stands on the cusp of 2 tcf, up by 488 bcf from last year at this time and 714 bcf above the 5-year average.

However, US demand for gas could escalate this summer if railroads don't improve the delivery of coal to electric generation plants. Power generators claim railroad mismanagement is "creating a coal shortage that has dropped their inventories to below reliability reserve levels and also made it difficult to manage costs," said Ronald J. Barone, managing director of equity research for the Natural Gas & Electric Utilities Group of UBS Securities LLC, New York.

"The Edison Electric Institute has reported that a few large utilities did not receive expected coal shipments recently and had to buy natural gas as a replacement. If there is no improvement in coal deliverability in the upcoming summer months, power generators will increasingly have to turn to natural gas for offpeak generation when coal supplies are running low, rather than only using gas for periods of peak demand," Barone said. "Exactly how much of these coal supply woes will translate into increased demand in natural gas this summer is not clear, but some industry experts believe that it will be enough to impact the gas storage buildup."

Meanwhile, gunmen in Nigeria kidnapped at least two foreign oil workers from a bus, only a day after a Baker Hughes Inc. executive was shot and killed on his way to work in Port Harcourt (OGJ Online, May 11, 2006).

IEA lowers demand estimate
In a report released May 12, the International Energy Agency (IEA) in Paris reduced its 2006 estimate of the growth of world demand for crude by 220,000 b/d, or 15%, primarily because of weaker US demand as a result of high fuel prices and large exports of crude from former Soviet countries.

"We had been expecting such a revision, as the agency's prior 1.47 million b/d growth forecast was well above last year's 1 million b/d demand increase and because we believe that sustained high crude oil prices should slow consumption," said Jacques Rousseau, senior energy analyst at Friedman, Billings, Ramsey Group Inc., Arlington, Va.

IEA increased its forecast of the growth of crude supplies from producers outside the Organization of Petroleum Exporting countries by 30,000 b/d for a total growth of 1.2 million b/d. However, that estimate is "growing increasingly back-end-loaded, as supply has been slow to recover from a series of late 2005 outages. Over the past 5 years, non-OPEC supply has grown an average of 850,000 b/d/year," Rousseau said.

IEA reduced its 2006 call on OPEC supplies by 200,000 b/d to 29.2 million b/d. IEA estimates OPEC's sustainable production capacity at 30.3 million b/d, excluding Iraq, which is still trying to get back to prewar production levels.

Energy prices
The June contract for benchmark US light, sweet crudes grew by $1.19 to $73.32/bbl May 11 on the New York Mercantile Exchange. The July contract gained $1.11 to $74.68/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up by $1.19 to $73.33/bbl. Gasoline for June delivery bumped up by 5¢ to $2.22/gal on NYMEX. Heating oil for the same month advanced by 3.17¢ to $2.10/gal.

The June natural gas contract dropped 25.1¢ to $6.65/MMbtu on NYMEX, the largest retreat in nearly 2 weeks, said analysts at Enerfax Daily. Although the latest gas storage injection figure was "only slightly above expectations," they said, "the build plus an influx of selling at $7/MMbtu were just enough to take the wind out" of the previous day's rally.

In London, the May IPE contract for North Sea Brent crude gained 99¢ to $73.43/bbl. The May gas oil contract was unchanged at $626.25/tonne.

The average price for OPEC's basket of 11 benchmark crudes increased by $1.41 to $67.02/bbl.

Contact Sam Fletcher at [email protected].