MARKET WATCH: Oil prices continue climbing; gas price tumbles

Oil prices rose June 9 for the third consecutive session of the New York futures market, with crude climbing 1% despite a weak US job report and a stronger dollar.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 10 -- Oil prices rose June 9 for the third consecutive session of the New York futures market, with crude climbing 1% despite a weak US job report and a stronger dollar.

“The term structures for West Texas Intermediate and North Sea Brent both strengthened, along with the flat price,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group. In New York, reformulated blend stock for oxygenate blending (RBOB) “outperformed the oil complex, while distillate prices broadly tracked Brent prices,” he said.

The front-month natural gas contract, however, “pulled back 3.5% after hitting 10-month highs,” brought down by a bearish report of gas in storage and milder weather forecasts, said analysts in the Houston office of Raymond James & Associates Inc.

The Energy Information Administration reported the injection of 80 bcf of natural gas into US underground storage during the week ended June 3, above the Wall Street consensus of 78 bcf. That brought working gas in storage to nearly 2.2 tcf. That’s 255 bcf less than in the comparable period last year and 58 bcf below the 5-year average (OGJ Online, June 9, 2011).

However, Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “June is shaping up to be a scorcher across the entire eastern half of the US. Even with the heat, however, gas storage surprised to the upside this week in the [EIA] data, a trend we think could worsen into autumn.”

In the global gas market, he said, “China's gas demand now exceeds the UK as well as Germany, but this only hints at large demand increases projected over the next 5 years. Both China and Europe will increasingly draw upon a common source of supply—central Asia. We believe this will eventually lend support to European market prices as well as the principle of oil-indexation.”

Sieminski said, “Even without power issues, China's diesel balance would have been the focus of regional market attention given its dominant role. Based on the measures we employed, incremental diesel demand due to the power shortfall could be 200,000-225,000 b/d. Though power shortages are likely to worsen in 2012-13, sizable refining capacity additions should help loosen China's diesel balance.”

Imports of crude into China in May totaled 21.55 million tonnes—“virtually no change from the previous month, but hitting a new seasonal high,” Zhang reported. “Imports for oil products rose 5.3%, to 2.39 million tonnes, while exports of oil products jumped by 20%, to 2.46 million tonnes. For now, oil demand from China remains robust despite signs of a cooling in this economy on ongoing policy tightening.”

Gasoline inventories in the in Amsterdam, Rotterdam, and Antwerp (ARA) markets remained at seasonal low levels, “which is most likely driven by arbitrage-related flows out the region,” Zhang said. “Gas oil inventories in ARA rose further and set a new multiyear high, which is likely to keep the gasoil structure under pressure.”

New US claims for unemployment benefits increased by 427,000 in the latest week—“again below the market expectation and staying stubbornly well above the 400,000 mark for 2 months now,” Zhang reported. “Meanwhile, the European Central Bank kept the euro’s benchmark rate unchanged at its monthly meeting yesterday and gave a strong signal of a rate increase in July. In the post-meeting news conference, the ECB also expressed strong opposition towards any forms of a Greek default.”

He pointed out, “The euro-zone debt crisis is a crisis over debt and fiscal policies, rather than a currency crisis. Therefore, euro-zone debt won’t necessarily drag down the value of the euro.”

Zhang reiterated, “The health of the global economy remains the most important underlying factor driving the oil market. Therefore, we see the softening global economy as an increasing downside risk to the oil price in the near term. With regard to the Organization of Petroleum Exporting Countries, the biggest market-moving factor is likely to be the return of Libya’s oil supply.” Libyan rebels are again talking of restarting that country’s oil production.

“Now that Iran has made a hold-up on OPEC, we will have to wait until the end of the Iranian presidency of OPEC at the end of the year before seeing the organization functioning again (maybe),” said Olivier Jakob at Petromatrix, Zug, Switzerland. “In the meantime, the Gulf Cooperation Council (GCC) countries will supply additional barrels outside of an OPEC framework, but this is probably not well understood by the general population and is also a political debacle for the West.”

Therefore, he said, “We will not be surprised if we were to hear that the International Energy Agency (IEA) has decided [to approve] a decrease equivalent to 1.5 days of consumption in strategic stocks held by its members. Given that the oil consumption in the Organization for Economic Cooperation and Development countries is declining, the IEA members will need less stock to cover their stock-to-demand ratios, and at current prices it will be a budgetary help that a few countries will not refuse. Because of the declining demand and lower needs for stock-to-demand ratio, such a release would not necessarily require a replenishment of stocks at a later date (i.e. it would be a net sale).”

In other news, Jakob noted, “Yesterday a lot of focus was also on the corn market, which reached new all-time record highs. The Mexicans and the US ethanol industry will not be a very happy crowd.”

Sieminski said, “The US Environmental Protection Agency has requested a nearly insurmountable amount of work from the US State Department on the Keystone XL project to move oil out of Cushing. We think the Brent-WTI spread is not going to be fixed soon.”

In its latest month report, OPEC said it’s benchmark reference basket fell $8.15 or almost 7% in May to an average near $110/bbl, “This decline—which was the first since July 2010 and the largest in percentage terms since May 2010—was attributed to bearish market sentiment, which triggered an outflow of investment from the paper oil market,” said OPEC officials. “The WTI front-month contract fell below $100/bbl for the first time since mid-March to average $101.36/bbl, the lowest since February’s $89.74/bbl. ICE Brent also declined sharply by $8.67 or 7% to average $114.42/bbl. This represents the first drop since last July.”

However, they noted continued unrest in the Middle East and North Africa maintained a risk premium in prices. So far in June, the OPEC reference basket has hovered around $110/bbl.

OPEC’s unsuccessful meeting on June 8 was not mentioned in the latest report (OGJ Online, June 9, 2011). Still, the group reported, “In recent weeks, the market has been experiencing excessive volatility. Recent economic data and releases point to a widening slowdown in global manufacturing activity and persistently high levels of unemployment. Concerns about the debt burden in the OECD area have also become more pronounced, at a time when major economies are preparing for the inevitable transition to fiscal consolidation with the end of quantitative easing. In the emerging economies, continued rapid growth has raised the risk of overheating and inflationary pressures. Despite these challenges, world growth in 2011 remains at 3.9%, driven by strong momentum in the emerging economies and steady growth in the OECD.”

The outlook for global oil demand in this year’s second half “shows a similar dichotomy,” they said.

Energy prices
The July contract for benchmark US light, sweet crudes climbed $1.19 to $101.93/bbl June 9 on the New York Mercantile Exchange. The August contract escalated $1.16 to $102.45/bbl. On the US spot market, WTI at Cushing was up $1.19 to $101.93/bbl.

Heating oil for July delivery increased 4.41¢ to $3.14/gal on NYMEX. RBOB for the same month gained 6.11¢ to $3.04/gal.

The July natural gas contract dropped 17.3¢ to $4.67/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 5.5¢ to $4.92/MMbtu.

In London, the July IPE contract for North Sea Brent crude advanced $1.72 to $119.57/bbl. Gas oil for June gained $6.50 to $977/tonne.

The average price for OPEC’s increased $1.50 to $113.43/bbl. The OPEC Secretariat in Vienna will be closed June 13.

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