MARKET WATCH: Crude price pushes above $73/bbl

Sam Fletcher
Senior Writer

HOUSTON, July 16 -- After testing the price level in the five previous sessions, the near-month benchmark US crude contract closed above $73/bbl on July 13 and may be headed higher in the New York market, analysts say.

On IntercontinentalExchange Inc. in London, speculators pushed North Sea Brent to an 11-month high above $77/bbl in intraday trading—less than $1 short of the all-time high of $78.65/bbl last August—on reports of production problems in the North Sea and forecasts of rising demand. BP PLC operators said July 6 it will take weeks to repair the UK's Central Area Transmission System (CATS) gas pipeline. The CATS line's protective coating was damaged when a large vessel dragged its anchor across the underwater pipeline. Traders fear both oil and gas production could be affected by the mishap. However, CATS was already operating at a reduced rate because of planned offshore field maintenance.

"US refinery upsets and the CATS impact on North Sea oil production rule the roost," said analysts at the Société Générale Group (SG). "There is not a single day without a news of a US refinery delayed restart or unexpected problems." The result is "tight product supply in the US coupled with tight crude oil supply in Europe," they said. SG analysts see oil prices "still shifting to the left, now centered beyond $74/bbl.

Benchmark US crude "continues to rise for a fifth week in a row with a maintained momentum bringing $75/bbl within reach and searching for the highs of last year. The dynamics remain as per last week in a very strong technical momentum but still in overbought territory," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

Analysts in the Houston office of Raymond James & Associates Inc. reported, "The price of crude surged past $74/bbl in premarket [activity on July 16], trading at its highest levels since last August.… Concerns about supply in the face of rising global demand have continued to push prices higher, even after a week of strong gains."

Adam Sieminski, chief energy economist, Deutsche Bank AG, New York, said that bank raised its price forecast for West Texas Intermediate and Brent crude to an average $60/bbl in 2010. "This compares with our prior $45/bbl estimate for both benchmarks and an average of $20/bbl in the 1990s," he said. "US natural gas prices are forecast to average $8/MMbtu in 2010, up from a prior $7/MMbtu."

Sieminski said, "A key justification for this move is that finding and development costs are rising rapidly and these are expected to rise further over the next few years. Moreover, geopolitical challenges to supply are also deteriorating, at least for now. Demand has not been as responsive to higher energy prices due to the growth in real incomes. Plausible substitutes for oil and gas are expensive. The timeframe for inducing the changes that could bring oil and natural gas prices down is getting longer."

Energy prices
The August contract for benchmark US light, sweet crudes touched an 11-month intraday high of $74.01/bbl July 13 before closing at $73.93/bbl, up $1.43 for the day on the New York Mercantile Exchange. The September contract gained $1.26 to $74.13/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.43 to $73.94/bbl. Heating oil for August delivery climbed 1.49¢ to $2.11/gal on NYMEX. However, the August contract for reformulated blend stock for oxygenate blending (RBOB) dropped 4.15¢ to $2.22/gal.

The August natural gas contract escalated by 16.5¢ to $6.66/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 9.5¢ to $6.36/MMbtu. The August futures market, climbed higher "on short-covering ahead of the weekend as crude oil futures continued to soar," said analysts at Enerfax Daily. "Institutions shrugged off [the report of] a huge storage injection last week and moved back into the market to lock up supplies before any mid-summer price spike, causing traders to cover their short positions ahead of a Midwest heat wave that could send prices higher. Overall US energy demand will increase to 18% above normal by July 20."

Enerfax analysts said, "Natural gas prices could easily jump back over $7[/MMbtu] on short-covering and expected weather conditions later in the summer."

Robert S. Morris, Banc of America Securities LLC, reported the composite spot natural gas price rebounded to $6.25/MMbtu, "underscored by one of the strongest heat waves across the Northeast so far this summer, which was followed by forecasts late last week calling for above-normal temperatures over much of the western portion of the country near term."

Meanwhile, natural gas prices overall are down 17% in the last month despite the threat of possible hurricanes in the Gulf of Mexico.

In London, the August IPE contract for North Sea Brent crude jumped by $1.17 to $77.57/bbl. Gas oil for August lost $5 to $655/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes increased by 53¢ to $72.49/bbl. Little more than halfway through this year, OPEC's basket price has averaged $60.51/bbl, compared to $61.08/bbl for all of 2006.

Contact Sam Fletcher at [email protected].