MARKET WATCH: US crude futures top $65/bbl before Memorial Day

The front-month crude contract jumped above $65/bbl May 25 on the New York market in expectation of strong demand for gasoline over the 3-day Memorial Day weekend.

Sam Fletcher
Senior Writer

HOUSTON, May 29 -- The front-month crude contract jumped above $65/bbl May 25 on the New York futures market in expectation of strong demand for gasoline over the 3-day Memorial Day weekend that unofficially marked the start of the summer driving season in the US.

The American Automobile Association reported the average retail price for US gasoline slipped to $3.225/gal on May 25, down from a record high of $3.227/gal a day earlier, and compared with average prices of $2.862/gal at the same time a year ago and $2.109/gal in 2005 before Hurricanes Katrina and Rita disrupted offshore production of oil and gas in the Gulf of Mexico and damaged several refineries along the Gulf Coast. Damage from those two storms still has not been fully repaired and the lost production has never been made up. A continuing problem with unexpected refinery outages threatens US gasoline supplies.

Markets also remain uneasy over global oil supplies after gunmen in Nigeria seized 10 foreign oil workers, including three US citizens, four Britons, and a South African off of a pipe-laying vessel in the Niger Delta. Oil was reported to be trading lower in international markets May 29 on news that Nigerian oil workers have ended their strike and returned to work. "But even if the current situation is resolved, the Nigerian oil sector will still have serious long-term problems," said analysts in the Houston office of Raymond James & Associates Inc.

"Certainly, West Africa should be one of the world's growth areas for oil extraction, along with the Middle East, the Caspian Sea region, Russia, and Canada. But growth in West African oil will not be spread out evenly. If the climate for investment in Nigeria remains like it is today, for both economic and safety reasons we should see more energy companies gravitating toward other countries in the region, such as Angola and Gabon," Raymond James analysts said.

Analysts at Barclays Capital Commodities Research, London, reported May 29, "Oil prices start the week on a soft tone amid thin trading conditions due to the [holiday] absence of US and UK market participants and news that the US and Iran have held their first official meeting in almost 30 years."

US and Iranian representatives met officially for the first time since diplomatic ties between the two countries were broken off in January 1980. The meeting in Baghdad to discuss Iraq's security issues was described as positive by both sides. Although there was no reference to Iran's nuclear program, European Union Energy Chief Javier Solana is slated to meet Iranian nuclear negotiator Ali Larijiani this week for a new rounds of talks.

Energy prices
The July contract for benchmark US light, sweet crudes escalated by $1.02 to $65.20/bbl, May 25 on the New York Mercantile Exchange. The August contract gained 89¢ to $66.52/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.17 to $64.76/bbl. Heating oil for June delivery inched up by 1¢ to $1.94/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) jumped by 4.68¢ to $2.40/gal. "US RBOB may have found its short-term fair value in the $2.40-2.50 range," said analysts at the Société Générale Group. "Crude does not have any upside potential if RBOB can't break the $2.45/gal mark. The market needs some fresh news on the fundamentals to revive the positive momentum."

The June natural gas contract lost 4.1¢ to $7.64/MMbtu on NYMEX. On the US spot market, natural gas at Henry Hub, La., dropped 9¢ to $7.48/MMbtu.

In London, the July IPE contract for North Sea Brent crude traded as high as $71.22/bbl on May 25 before closing at $70.69/bbl, down 3¢ for the day. Gas oil for June lost $7.50 to $605.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes dropped 50¢ to $66/bbl on May 28. So far this year, OPEC's basket price has averaged $58.13/bbl compared to an average $61.08/bbl for all of 2006.

Contact Sam Fletcher at samf@ogjonline.com.

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