MARKET WATCH: Oil climbs above $75/bbl, while gas tops $5/MMbtu

The front-month crude contract rebounded June 14 above $75/bbl, recovering most of its June 11 loss in the New York market while the near-month natural gas contract climbed above $5/MMbtu.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 15 -- The front-month crude contract rebounded June 14 above $75/bbl, recovering most of its June 11 loss in the New York market while the near-month natural gas contract climbed above $5/MMbtu.

Crude rallied early in the session as European industrial production increased 9.5% year-over-year, posting the biggest gain on record.

Gas surged to a 16-week high with the biggest 1-day gain since June 3 in anticipation of higher cooling demand as US temperatures are expected to rise for the next 2 weeks, said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston.

“Weather in the Midwest, Mid-Atlantic and Southern US in particular, is expected to stay much above normal this week. Markets were further spooked into buying as a low-pressure weather disturbance located west-southwest of the Cape Verde Islands in the Atlantic Ocean, which has the potential to develop into tropical cyclone, gave first signs of an impending active hurricane season consistent with the earlier forecasts,” he said.

Natural gas prices are now at a level where coal is becoming increasingly competitive, “and we could see a reversal of around 1-2 bcfd of [previous] fuel-switching,” Sharma said.

“Gains were pared late in the session after Greece's debt was cut to junk status by Moody's Investors Service,” said analysts in the Houston office of Raymond James & Associates Inc. Energy stocks were mixed.

In other news, Fitch Ratings downgraded BP PLC’s debt rating “by a whopping six notches” to BBB following a previous reduction to AA, “leaving it just barely in investment-grade territory,” Raymond James analysts reported. “All three major rating agencies [Fitch, Moody’s, Standard & Poor’s Corp.] had already cut BP by one notch earlier this month, but Fitch is the first with such a dramatic cut. In its downgrade, Fitch cited the risk of BP being forced to place huge sums ($20 billion is the initial demand from a group of Senate Democrats) into an escrow account, which would necessitate significant borrowing. BP's credit default swaps are currently trading [at] a level consistent with junk bonds.”

Meanwhile, BP executives were bracing for President Barack Obama’s June 15 televised evening address on the oil spill from the Oval Office. In his fourth Gulf Coast visit on June 14-15, Obama threatened to take over BP's processing of claims from Gulf Coast residents if the company doesn't establish an independent entity for that purpose. White House lawyers also were reported investigating the president's authority to legally prevent BP from paying its dividend to shareholders—“an issue that is further complicated by BP's status as a foreign company,” Raymond James analysts said.

BP directors met June 14 to consider potential options for the dividend, including suspending any payment for two quarters, paying the dividend by issuing new shares, or escrowing the amount while covering the mounting expenses for the cleanup. Obama will meet with BP executives June 16 for the first time. Those executives also are to appear before a Senate committee later this week.

Sharma reported, “The government could disbar BP from previous lease sales, although, this has never been done (North Carolina and Florida leases have been pulled but only due to the states’ decision to ban drilling). Unfortunately, politics of the event are still whirling around, not a lot of clarity yet, even from a group that is very tied in to the lobbying efforts in the capital.”

Following a Gulf of Mexico investor call, Sharma said the government may be looking for a “graceful way” to rescind the moratorium on deepwater drilling. That “gives credence to our thesis that [rig] day rates will not collapse and that the majority of rigs will likely remain in the gulf, based on economic impact to Gulf States and the 50,000-plus [oil-related] jobs that will be lost,” he said.

Industry observers expect the liability cap under the Oil Pollution Act of 1990 to be raised from $75 million to possibly as high as $10-20 billion. “The number seems high [and] would materially impact smaller gulf deepwater companies, essentially limiting the market to the national oil companies and majors,” Sharman said. Drillers and operators are uncertain about new safety standards “as certification requirements have unknowns,” particularly in regards to blowout preventer certification, he said.

Thompson & Knight LLP issued a client alert in which it warned, “The drilling moratorium and Macondo spill litigation may result in some oil and gas companies undergoing financial distress. No company is ‘too big to fail.’”

The attorneys noted an operating agreement usually grants the operator a contractual, consensual lien on the non-operator’s interest in the minerals to secure the non-operator’s obligations under the joint operating agreement (JOA) and grants a non-operator a lien to secure the operator’s obligations. “A contractual operator’s lien is generally not binding on third parties unless the JOA or a memorandum of it, with a sufficient description of the lien rights, is filed of record,” they said. “Make sure your company has perfected its operator or non-operator’s lien by filing a memorandum of the JOA with reference to the lien.”

They also advised prompt recording of all assignments of leases and making sure the client’s insurance is in order “in the event a contract counterpart goes bankrupt.” They said, “If a company is relying on indemnification from another party for accidents or other losses, consider asking to be named as an additional insured under that party’s insurance policy; make sure you receive a copy of the endorsement to that effect.”

After meeting with Republican Govs. Haley Barbour of Mississippi and Bobby Jindal of Louisiana in Gulfport, Miss., Obama said vacationers shouldn’t cancel planned trips to the Gulf Coast where many beaches remain untouched by the oil spill.

Under government pressure to step up its oil spill operations, BP said it plans to siphon 40,000-53,000 b/d of crude from the Macondo well by the end of June, up from 15,000 b/d currently.

Energy prices
The July contract for benchmark US light, sweet crudes regained $1.34 to $75.12/bbl June 14 on the New York Mercantile Exchange. The August contract advanced 94¢ to $76.28/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.34 to $75.12/bbl. Heating oil for July delivery increased 1.97¢ to $2.03/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 2.67¢ to $2.08/gal.

The July natural gas contract climbed $22.5¢ to $5.01/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 24.5¢ to $4.97/MMbtu.

In London, the July IPE contract for North Sea Brent crude increased 85¢ to $75.20/bbl. Gas oil for July gained $13 to $652.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up $1.06 to $73.35/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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