MARKET WATCH: Energy prices rise with signs of economic recovery

Hopeful signs of economic recovery continued to raise energy prices Aug. 24 despite a strengthening US dollar, but resistance kept the front-month crude contract below $75/bbl in the New York market.

Aug 25th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 25 -- Hopeful signs of economic recovery continued to raise energy prices Aug. 24 despite a strengthening US dollar, but resistance kept the front-month crude contract below $75/bbl in the New York market.

Energy futures derived support from continued strong demand from China as implied oil demand rose 3.5% in July from a year ago because refineries increased utilization.

Olivier Jakob at Petromatrix, Zug, Switzerland, surmised: “West Texas Intermediate is starting to enter a value area where the fundamentals should start to have greater weights and will bring an increasing risk on trading exogenous inputs. The American Petroleum Institute and Department of Energy [reports of] crude stock draws were instrumental in providing support to crude oil last week and the weekly datasets should be pivotal this week in determining which side of $75/bbl we trade on for the second half of the week.”

Jakob said, “WTI has now caught up to [North Sea] Brent on the time-spreads and in doing so has moved from a deep arbitrage discount to Brent back to a premium. The September futures on products will expire Aug. 31, and we will need to pay attention as well to the weekly statistics on products as the gasoline crack and front spreads are improving on the expectation that a relative prompt cash market could result in a tight expiry.”

Standard & Poor's Ratings Services recently changed its oil and gas pricing assumptions. “Because of poor industrial demand in North America and concerns about oversupply, natural gas prices have continued their downward spiral,” said S&P’s credit analyst Thomas Watters. “The price of crude oil, however, has surged recently, reflecting a more optimistic outlook for the global demand of transportation fuels.”

In New Orleans, analysts at Pritchard Capital Partners LLC reported gas prices were down in early trading Aug. 25 after rising 4.2%, in the previous session. “China increased LNG imports to a record high in July, or up 78% year-over-year, after demand rose during the summer consumption peak, limiting the supply of LNG to North America,” they said. “The price ratio between crude and natural gas now stands at 25.5:1, or nearly double last year’s average of 12.8:1, vs. the oil-to-LNG price ratio in Asia of 8.5:1. In comparison to 2002 when prices last traded at these levels, total consumption was 1% less from January-May, while production was 10% more compared to the same period, indicating overall fundamentals are worse now than they were in 2002.”

They said, “Despite the supply and demand imbalance, natural gas may be slightly oversold given the forward 12-month curve stands at nearly $6/MMbtu, or double the current month’s contract. We believe that decline curves will show effects in late fourth quarter based on the nonvertical rig count decreasing by 455 rigs, or 43% over the past 49-weeks from the rig count peak, 30% fewer wells drilled during first half of 2009 vs. the first half of 2008, and voluntary shut-ins by Chevron Corp., EnCana Corp., and most recently Newfield Exploration Co.’s announcement to shut in 2.5 bcf of gas equivalent of its third-quarter production, will work off excess supply and bring the market into balance by the first quarter of 2010, setting the stage for a rally in prices.”

In other news, Jakob noted all refineries in Eastern Canada are reported to have survived Hurricane Bill with no damage.

Energy prices
The October contract for benchmark US sweet, light crudes increased 48¢ to $74.37/bbl on the New York Mercantile Exchange. The November contract gained 26¢ to $75.08/bbl. On the US spot market, WTI at Cushing, Okla., was up 63¢ to $73.19/bbl as it tried to realign with the front-month futures contract. Heating oil for September delivery increased 1.85¢ to $1.92/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month continued climbing, up 5.35¢ to $2.05/gal.

The September natural gas contract escalated by 11.9¢ to $2.93/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 8.5¢ to $2.73/MMbtu.

In London, the October IPE contract for North Sea Brent crude inched up 7¢ to $74.26/bbl. Gas oil for September gained $8.75 to $610.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased to $72.89/bbl on Aug. 24 from the previous session’s upwardly revised price of $72.27/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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