MARKET WATCH: Energy prices rebound as US market returns from holiday

Energy prices rebound July 5, wiping out the modest losses on July 1 prior to the long US Independence Day weekend holiday; the front-month crude contract jumped 2% in the New York market while natural gas was up 1% on forecasts of warm weather.

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 6 -- Energy prices rebound July 5, wiping out the modest losses on July 1 prior to the long US Independence Day weekend holiday; the front-month crude contract jumped 2% in the New York market while natural gas was up 1% on forecasts of warm weather. Both were priced lower in early trading July 6.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “After the surge in the equity markets last week crude oil rallied in a well-defined ascending channel but without a clearly identified catalyst. Oil products could not follow the lead of crude oil and the gasoline crack had to give back the gains it made last week. With the collapse last week of corn prices the ethanol-corn crush margins have risen to the highest level since a year ago.”

However, he said, “Brent managed to regain on the front the backwardation it had before the announcement of the International Energy Agency’s release [of emergency crude supplies held by members], but the second line of spreads are still flat. The Light Louisiana Sweet premiums are, however, still being capped by the US Strategic Petroleum Reserves release.”

Playing the oil sale game
Larry Goldstein, special projects director at the Energy Policy Research Foundation Inc., Washington, DC, told OGJ Online “people willing to play the game” submitted bids for SPR crude that “were well outside” the 5% discount below the base reserve price of $112.78/bbl that the Department of Energy said was the minimum it would accept. Because the US government was determined to sell 30 million bbl of crude to force down prices, “not merely offer it for bidding,” some companies submitted an initial bid for a specified amount of oil and then bid for additional amounts at prices “$2/bbl lower,” he said.

“This sale, which has proven to be poorly timed, has subsidized a part of the refining sector that the White House was going after for allegedly getting too many subsidies,” said Goldstein. “ConocoPhillips and ExxonMobil Oil Corp., to their credit, tried to play it straight. But [other] traders understood the administration’s intent, which was to move 30 million bbl of oil, and were able to aggressively bid and win.”

He claims 24 of the 52 apparently successful bids announced by the DOE “were well below the 5% discount range” and at levels DOE officials earlier said they would reject. “These were bankers who understood the system and knew how to game it,” he said.

The lowest apparently successful bid was $104.98/bbl submitted by Barclays Bank PLC for 200,000 bbl of SPR crude to be delivered by pipeline. Valero Energy Corp., San Antonio, had “multiple successful bids,” paying as little as $105.62/bbl and as high as $109.76/bbl, Goldstein said. Aside from Barclays’ low-ball bid, J.P. Morgan Ventures Energy Corp., Stamford, Conn.; Hess Energy Trading Co. LLC (Hetco), New York; Trafigura AG, Houston; and BP Oil Supply, Chicago “had winning bids from as low as $105.01/bbl (Hetco) to $105.33/bbl (J.P. Morgan),” he said. “Vitol Inc., Houston, had four successful bids, all at a relatively high offer of $108.05/bbl.”

Ordering the sale of 30 million bbl from SPR “was a mistake,” Goldstein said. Nor did it succeed as the Obama administration had hoped. He said, “The [market] price for crude is probably higher now than it was on June 22” prior to announcement of the pending sale of emergency oil supplies.

Meanwhile, Greece and the US seem to be competing as to who will be first to default on their sovereign debts, said analysts in the Houston office of Raymond James & Associates Inc. “It's probably not a contest the US ought to be winning, but with less than 4 weeks left on the clock until the federal debt ceiling is reached, our politicians are certainly not making it easy for the Greeks,” they said. “The markets appear to be hoping neither country reaches the finish line: after a banner week of gains last week (with Standard & Poor’s 500 index up 6%), the broader market consolidated yesterday in a light day of trading. That coincided with Moody's [Investors Service Inc.] downgrade of Portugal's debt to junk—yet another competitor in the ‘who defaults first’ Olympics.” The strength in commodities boosted energy stocks, they said.

In other news, government officials ordered ExxonMobil to rebury its Silvertip pipeline for safety reasons after it developed a leak last week in Montana (OGJ Online, July 5, 2011). The company also has to submit a restart plan before the 69-mile pipeline can come back online and resume deliveries to Exxon's Billings, Mont., refinery, which has reduced its run rate with the interruption in its crude supply.

ConocoPhillips curbed production from its Penglai oil field in China's Bohai Bay by 10-15% while it cleans up oil that was leaked last month. Two separate leaks were discovered June 4 and June 17, but company officials said there are no leaks currently. Last year production from the field averaged 56,000 b/d, said Raymond James. It is a JV between CNOOC and Conoco, which serves as operator.

Energy prices
The August contract for benchmark US light, sweet crudes escalated by $1.95 to $96.89/bbl July 5 on the New York Mercantile Exchange. The September contract gained $1.87 to $97.38/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.95 to $96.89/bbl.

Heating oil for July delivery increased 3.21¢ to $2.96/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month continued inching up, gaining 0.48¢ to $2.98/gal.

The July contract for natural gas increased 5.2¢ to $4.36/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed 5.5¢ to $4.38/MMbtu.

In London, gas oil for September jumped by $13 to $935.50/tonne. The front-month Brent price was unavailable.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes increased 25¢ to $107.12/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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