MARKET WATCH: Economy improvements push up crude price

The price of crude climbed July 20 for the fourth consecutive session of the New York market, buoyed by a weak dollar and encouraging economic indications.

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 21 -- The price of crude climbed July 20 for the fourth consecutive session of the New York market, buoyed by a weak dollar and encouraging economic indications.

The US dollar dropped to a 6-week low against the euro as stronger-than-expected corporate earnings encouraged investors to take more risk.

For the third consecutive month, the New York-based Conference Board's index of leading economic indicators increased, up 0.7% in June, outstripping the consensus for a gain of 0.4%. The group reported economic indicators through the first 6 months of 2009 were up 2% for a 4.1% annual growth rate, the strongest since the first quarter of 2006.

“Crude also got support from reports that refiners in China increased operating rates for an eighth week to 85.1%,” said analysts at Pritchard Capital Partners LLC, New Orleans.

The August contract for benchmark US crudes was up in early trading July 21. That contract expires at the close of regular trading on the New York market.

Olivier Jakob at Petromatrix, Zug, Switzerland, noted the US Highway Administration reported vehicle miles traveled (VMT) on US roads and highways in May increased 0.1% from May 2008. Although not a strong increase, Jakob said, “It is the second month of positive growth, and we have to go back to 2007 for the last time that the VMT were showing some consecutive growth. We also have to keep in mind that April showed some higher than expected growth in VMT, and that was followed by the Department of Energy surprisingly revising demand higher in the monthly revisions for April.” DOE could again revise May oil demand upwards in the report scheduled for the end of July, he said.

Natural gas
Natural gas prices increased July 20, with the front-month New York contract up 13% in the past week. “We still expect further weakness in prices later this summer and fall. Despite the fact that the number of active domestic gas rigs has fallen to its lowest point in 7 years, the market should push the limits of domestic storage capacity by October,” said analysts in the Houston office of Raymond James & Associates Inc.

Analysts at FBR Capital Markets & Co. in Arlington, Va., reported coal as a fuel fell to 45.4% of total US electric power generation in the first 5 months of this year, compared to 49.6% in the same period last year. On the other hand, gas as a fuel increased to 20.8% in the same 2009 period from 19.4% last year. “However, for the month of May, coal as a percent of total generation fell from 48% to 42.7% whereas gas gained from 19.1% to 20.8%, indicating that there were more fuel switching in the shoulder season than other periods,” the analysts said. “If the natural gas price stays low, we anticipate further fuel switching in the next shoulder season in 2 months.”

Pritchard Capital Partners reported, “North American coal fundamentals remain quite weak, likely keeping pressure on natural gas over the next 2-3 months with burn levels (in terms of days) at all-time highs (30% above year-ago levels, on average, in the three key regions). Production declines from mine closures in the Powder River basin and Northern Appalachia have yet to impact supply significantly. Natural gas shrugged off initial weakness due to reports that indicate US LNG terminals might see an increase in LNG imports in August and September.”

They noted, “Last week the August and September gas delivery contracts on the New York Mercantile Exchange closed higher than the ICE European market contract. Year-to-date, LNG imports [into the US] have been a non-event, and based on the need for European LNG users to fill storage, LNG looks like it may remain a non-event for the remainder of 2009.”

They said, “Based on the rig count reductions and announced shut-ins, domestic natural gas producers are dong what they can to reduce supply, and as a direct result natural gas appears to be in the bottoming process. However, to get a meaningful turnaround in natural gas, the market will need more evidence of a stronger economy and stronger industrial demand.”

Energy prices
The August contract for benchmark US sweet, light crudes rose 42¢ to $63.98/bbl July 20 on NYMEX. The September contract gained 71¢ to $65.29/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 42¢ to $63.98/bbl. Heating oil for August delivery climbed 4.84¢ to $1.69/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month increased 1.95¢ to $1.79/gal.

The August natural gas contract gained 2¢ to $3.69/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 2.5¢ to $3.44/MMbtu.

In London, the September IPE contract for North Sea Brent crude increased $1.06 to $66.44/bbl. Gas oil for August gained $12 to $538.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up $1.41 to $64.64/bbl July 20.

Contact Sam Fletcher at samf@ogjonline.com.

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