MARKET WATCH: Crude hits new high for 2009 near $75/bbl

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 24 -- The new front-month October crude contract shot up to near $75/bbl in intraday trading before settling at a new high for the year on Aug. 21 in New York as economic data backed claims by Federal Reserve Chairman Ben Bernanke that the US economy is nearing recovery.

In a speech at an annual Federal Reserve conference in Jackson Hole, Wyo., Bernanke said that “prospects for a return to growth in the near term appear good.” The National Association of Realtors also reported home sales rose 7.2% to a seasonally adjusted annual rate of 5.24 million in July from 4.89 million in June, the largest monthly increase in at least 10 years (OGJ Online, Aug. 21, 2009).

The front-month crude contract last week “managed to fully reverse the pressure of the previous week and finished $4.29/bbl higher to print a new high for the year on a continuous basis,” said Olivier Jakob at Petromatrix in Zug, Switzerland. He said, “[The Brent October contract] gained $2.75/bbl, while heating oil (September) was higher by $2.68/bbl and reformulated blend stock for oxygenate blending (RBOB) by $2.42/bbl.”

In New Orleans, analysts at Pritchard Capital Partners LLC reported, “Crude ran through its $73/bbl resistance and in intraday trading crossed $74/bbl for the first time in 10-months on continued weakness in the US dollar and a higher than forecasted increase in US existing home sales, which climbed the most on record, further supporting a US economic recovery. October crude prices rallied over 6% on the week to gain 66% for the year.”

They warned, however, “A pullback is possible given the underlying weak fundamentals of lower US consumption and crude stockpiles of 343.6 million bbl, which are 8% above their 5-year average and 12% above last year’s inventories when crude rallied to record highs. But a weak dollar, improving US economic data, and increased global demand, as evidenced by South Korea, the world’s ninth-largest consumer of crude, consuming 63.66 million bbl in July, which is up 5.2% year-over-year, may continue to drive prices higher.”

Crude continued to hover around 10-month highs in early trading Aug. 24 amid continued strengthening in the domestic and Chinese equity markets. Analysts in the Houston office of Raymond James & Associates Inc. reported, “Nigerian rebels have renewed calls for attacks on that country's infrastructure that could disrupt oil production and increase prices.” Meanwhile, they said, crude seems to be hitting some resistance when trying to pass the $75/bbl mark.

Natural gas prices continued to decline after falling Aug. 21 to the lowest closing on the New York market in 7 years. Pritchard Capital Partners said, “For the week, [gas] prices declined 13.4%, or 43¢, and the price ratio between crude oil and natural gas now stands at 26.4:1. Assuming US storage is 3.9 tcf, capacity is at 82% utilization with 13 weeks remaining in the typical injection season. A 53.5 bcf weekly injection over the next 13 weeks, which is just slightly below the 55.3 bcf average over the past 5 years, would test maximum capacity and continue to send prices lower.”

They said, “Natural gas production continues to hold more steadily than the halving of the rig count may imply due to resilient production from exploration and production companies and greater efficiencies achieved by advanced rigs. The timing of a significant demand recovery is still questionable and inventories remain approximately 500 bcf greater than the 5-year average. We are becoming more cautious that some of the drillers are becoming overextended in the face of still-weak natural gas fundamentals, although signs of an emerging economic recovery may continue to prop up the stocks.”

Pritchard Capital analysts said, “According to Baker Hughes Inc., the number of rigs drilling for natural gas has increased by 30 to 695 rigs over the past 5 weeks as 55% more rigs are now drilling for gas in the Marcellus shale than averaged in the second quarter and 24% more rigs are operating in the Haynesville shale than its second quarter average. Involuntary shut-ins, Gulf of Mexico storms curtailing production, and a sharp improvement in industrial demand, similar to Aug. 21 reported gains in the manufacturing index in both France and Germany, are the best hope for higher gas prices in 2009.”

With capital expenditures down virtually across the board so far this year, Raymond James analysts said, producers are “highgrading” activity, adhering more closely to their cash flows, and are focused on strengthening balance sheets. “It now appears that spending (and drilling activity) has bottomed and for many companies will actually be on the rise over the next 6 months. Looking toward 2010 we believe that spending, especially on the gas side, could potentially be down modestly further given possible downward revisions in upcoming borrowing base redeterminations. That said, drilling activity should be up nicely in 2010 as lower drilling costs trump modestly lower E&P capex,” they said.

Energy prices
The October contract rebounded 98¢ to close at $73.89/bbl Aug. 22 on the New York Mercantile Exchange. The November contract gained $1.05 to $74.82/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 65¢ to $73.19/bbl. Heating oil for September delivery increased 1.97¢ to $1.90/gal on NYMEX. RBOB for the same month rose 1.34¢ to $2/gal.

The September contract for natural gas continued to fall, down 14.1¢ to $2.80/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 20.5¢ to $2.81/MMbtu.

In London, the September IPE contract for North Sea Brent gained 86¢ to $74.19/bbl. Gas oil for September lost $2 to $601.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dipped 35¢ to $72.22/bbl on Aug. 21. So far this year, the OPEC basket has averaged $54.66/bbl.

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts said: “With the giddy excitement of OPEC’s next ministerial conference less than 3 weeks away, it is becoming increasingly likely that there will be no change to the existing quota system for the foreseeable future. Following the establishment of the current quota levels at the end of 2008, OPEC has done a pretty good job by historical standards of keeping production under control.

“For most of this year the compliance rate was about 80%, but recently the return of higher prices has proved too tempting for some and production volumes are rising, albeit not hugely. The compliance rate is now 75% and the future production trend, weighed against the prospects for global demand, needs to be watched carefully. If compliance is still slipping by the date of the end-year OPEC meeting (Dec. 22) and the market fundamentals haven’t improved and prices are under threat, then expect a massive bust-up. In the meantime, for OPEC ministers these are happy days: at the beginning of January they would have killed for $70/bbl,” KBC analysts said.

Contact Sam Fletcher at [email protected].