MARKET WATCH: Crude approached $100/bbl at end of a volatile trading week

Energy prices continued climbing May 13, ending the volatile week with the front-month crude contract closing closer to the $100/bbl mark in the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 16 -- Energy prices continued climbing May 13, ending the volatile week with the front-month crude contract closing closer to the $100/bbl mark in the New York market.

Crude inched up 1% “on positive gross domestic product growth data from the European Union and on fears of rising flood waters from the Mississippi river shutting down inland hydrocarbon production around Louisiana,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas traded flat. Energy stocks were mixed,” they said.

However, crude, gas, and broader market prices were down in early trading May 16 among increasing concerns over the pending bailout of Greece by the European Union and the International Monetary Fund, they said.

“Crude oil prices are still failing to move higher. Much of the downside pressure is coming from the stronger dollar,” said Walter de Wet at Standard New York Securities Inc., the Standard Bank Group.

He said, “The large sell-off in West Texas Intermediate crude 2 weeks ago is reflected in the latest Commodity Futures Trading Commission data. Not only has the noncommercial longs decreased length substantially (from 432,000 contracts at the end of April to 389,000 contracts last week), noncommercial shorts have risen rapidly too.”

De Wet said, “The market is clearly less optimistic about crude’s prospects than a few weeks ago.” He said, “We therefore believe that crude oil will struggle to rally substantially in the coming days.”

Continued volatility
Strategically, De Wet said, “We expect volatility to be higher this year than last year, due to the diminished efficacy of three factors that usually protect the oil market from supply shocks: oil inventories, the Organization of Petroleum Exporting Countries’ spare production capacity, and spare capacity in the global refining system. We see further upside risks to oil prices.”

He expects OPEC to raise its production quotas at its June 2 meeting. “However, we doubt that an upward revision to quotas can negate Libya’s production loss, and the [June expiration of QE2, the second phase of the Federal Reserve Bank’s quantitative easing program to stimulate the economy] isn’t likely to arrest the strong growth in global liquidity caused by reserve accumulation. Therefore, we believe that OPEC’s supply restrictions and abundant global liquidity will continue to pose upside risks to oil prices,” he said.

Meanwhile, RBC Capital Markets LLC raised second quarter earnings estimates for refiners an average 30% above the Wall Street consensus because of near-record refining margins and wide crude oil differentials. Jacques Rousseau at RBC Capital Markets, said, “We expect the strength of second quarter earnings to become better recognized by the market following a competitor's refining conference on [May 19].”

He reported, “Although we do not anticipate any major refinery outages in Louisiana due to flooding, there is likely to be lower production at some refineries since high water levels should impact oil tanker traffic and loading of refined products and cause some oil pipelines to close. Additionally, since the Mississippi river is not expected to crest in Louisiana until May 20-24, uncertainty should remain until then, supporting refining margins and refining share prices.”

Rousseau added, “We are concerned that high retail gasoline prices will reduce demand further (data from the Energy Information Administration show gasoline consumption down 2.4% over the past 4 weeks vs. year-ago levels). Additionally, refiners could increase production levels to take advantage of strong margins, but this dynamic has yet to occur this year due to the high level of planned and unplanned downtime.”

Obama policy changing?
In other news, Raymond James analysts pointed out US President Barack Obama’s “pro-drilling” comments in a May 14 radio address “that potentially indicate a slight energy policy shift.” Obama indicated the Department of the Interior will conduct annual lease sales in Alaska's National Petroleum Reserve, speed resource evaluations off the eastern seaboard, and extend lease periods for Gulf of Mexico acreage impacted by the deepwater drilling moratorium.

Meanwhile, some Democrats in Congress are pushing to impose fines and addition fee’s if producers don’t immediately drill and produce leases they already hold.

“While there is certainly an element of political posturing here—the president also reiterated his call to rescind $4 billion/year in drilling incentives—these are tangible steps that can reduce regulatory constraints on domestic drilling,” they said.

Energy prices
The June contract for benchmark US light, sweet crudes climbed 68¢ to $99.65/bbl May 13 on the New York Mercantile Exchange. The July contract gained 64¢ to $100.12/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 68¢ to $99.65/bbl.

Heating oil for June delivery rose 2.85¢ to $2.94/bbl on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 1.05¢ to $3.07/gal.

The June contract for natural gas advanced 5.2¢ to $4.25/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 1¢ to $4.11/MMbtu.

In London, the June IPE contract for North Sea Brent was up 85¢ to $113.83/bbl. The new front-month June contract for gas oil gained $3.75 to $1,152.25/tonne.

The average price for OPEC’s basket of 12 benchmark crudes increased $1.75 to $108.93/bbl. So far this year, OPEC’s basket price has averaged $105.99/bbl.

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