MARKET WATCH: Crude oil, natural gas prices increase

Energy prices increased with the front-month crude futures contract up modestly June 2 in New York, carried along by a surge in the equity market after the US Department of Labor reported an increase in productivity and layoffs declined for a second consecutive week.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 3 -- Energy prices increased with the front-month crude futures contract up modestly June 2 in New York, carried along by a surge in the equity market after the US Department of Labor reported an increase in productivity and layoffs declined for a second consecutive week.

However, officials said productivity advanced in the first quarter at a slower rate than previously reported, and the recent declines in layoffs followed a sharp increase 3 weeks ago, with layoffs remaining at higher levels.

“Energy stocks rebounded sharply [June 2] and helped lead the way for the broader [equity] market surge. The rally was driven by investors jumping back into beat-down energy names following [the earlier] steep selloff. Oil prices, driven by stronger than expected reports for monthly US housing data, firmed up through the day,” said analysts in the Houston office of Raymond James & Associates Inc.

The home sales report increased 6% compared with economists’ expectations of a 5% hike—“another signal that the recovery is well entrenched in the US,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “Crude even overcame an earlier intraday decline of 1.2% as the euro approached a 4-year low against the dollar. The brighter economic outlook lifted the equities markets as well as the Dow Jones Industrial Average, which rose 2.3% on performance of the energy markets,” he said.

Raymond James analysts said, “Driven by increased demand from warmer weather, intraday gas prices touched a 2-week high, closing the day 4% higher. Expect commodity prices to take their cues from the slew of energy data out this morning.” The DJIA rose in early trading June 3 as did Standard & Poor's 500 Index.

As a result of the Macondo blowout and the Obama administration’s move to halt drilling in US waters of 500 ft or more, Raymond James analysts said, “We are modeling no Gulf of Mexico deepwater activity for a year (twice the length of the moratorium), and have made significant reductions in our floater day rates and utilization on a global basis, as this will have international ripple effects.”

Sharma said, “At this point, we think it more likely that a resumption of deepwater activity will be delayed or pushed out.” He noted Halliburton Co. expects deepwater activity in 12-24 months to be at only half its pre-blowout level, “after a hiatus of at least 6 months.”

Sharma said, “We believe that the offshore deepwater drilling moratorium would reduce supplies from the deepwater gulf by around 200,000 b/d by yearend as a natural decline would takeover due to the lack of new and maintenance drilling. This decline in domestic supplies will have to be replaced by higher imports from outside of North America, which would be supportive to prices in the medium term.”

As for natural gas, he said, “The deepwater drilling moratorium alone is likely to result in approximately 500 MMcfd production loss by yearend.”

Producers, drilling contractors, and other service companies are already moving personnel and equipment from the gulf to other markets. Anadarko Petroleum Corp., a partner in the Macondo well, declared force majeure on contracts for three of the four rigs it had working in gulf waters affected by the moratorium. The one rig still working is involved in completion, workover, and nondrilling activities.

Meanwhile, government and academic weather experts generally are forecasting a “hyperactive” hurricane season this summer that likely could disrupt oil and gas production from the gulf.

In another indication of higher gas prices in the near future, Sharma said, “The 12-month forward curve has rallied from $4.67/Mcf to $5.01/Mcf since May 24 on signs of future production declines in the gulf of Mexico due to drilling moratorium drive gains.”

In other news, Fitch Ratings Ltd., London, downgraded BP PLC’s credit rating from AA+ to AA, and placed it on “watch negative” Jan. 3, a day after BP’s credit default swaps reached record levels.

Oil, gas inventories
The Energy Information Administration reported June 3 commercial US inventories of crude fell 1.9 million bbl to 363.2 million bbl in the week ended May 28. The consensus on Wall Street was for no change. Gasoline stocks dropped 2.6 million bbl to 219 million bbl in the same period, far exceeding expectations for a 500,000 bbl decrease. Distillate fuel inventories increased by 500,000 bbl to 153 million bbl, compared with a consensus for a 200,000 bbl build.

The American Petroleum Institute earlier reported crude stocks down by 1.4 million bbl to 362.7 million bbl. Gasoline inventories declined 962,000 bbl to 217.2 million bbl. Distillate stocks increased 852,000 bbl to 149 million bbl in the week ended May 28.

EIA said imports of crude into the US in the same week were down 473,000 b/d to 9.5 million b/d. In the 4 weeks through May 28, US imports of crude averaged 9.7 million b/d, up 813,000 b/d from the comparable 4-week period in 2009.

The input of crude into US refineries rose 20,000 b/d to 15.1 million b/d last week with units operating at 87.5% of capacity, said EIA. Gasoline production increased to 9.2 million b/d, while distillate fuel production increased to 4.3 million b/d.

EIA also reported the injection of 88 bcf of natural gas into US underground storage in the week ended May 28. That pushed working gas in storage to almost 2.4 tcf, up 38 bcf from last year at this time and 306 bcf above the 5-year average.

Energy prices
The July contract for benchmark US sweet, light crudes regained 28¢ to $72.86/bbl June 2 on the New York Mercantile Exchange. The August contract advanced 60¢ to $74.50/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 28¢ to $72.86/bbl. Heating oil for July delivery increased 3.55¢ to $2.01/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month climbed 4.36¢ to $2.03/gal.

The July contract for natural gas escalated 17.6¢ to $4.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 6¢ to $4.33/MMbtu.

In London, the July IPE contract for North Sea Brent gained $1.04 to $73.75/bbl. Gas oil for June lost $2.75 to $637/tonne.

The Organization of Petroleum Exporting Countries’ office in Vienna was closed June 3, so no price information was available.

Contact Sam Fletcher at samf@ogjonline.com.

More in Economics & Markets