MARKET WATCH: Energy prices rally on confidence in economic recovery

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 16 -- Energy prices continued to rally June 15 on the New York market as manufacturing in that state increased for the 11th consecutive month, supporting confidence in the economic recovery.

“That sent the Dow Jones Industrial Average up 2.1% and the Standard & Poor’s 500 index up 2.3% as the markets also shrugged off further concerns about Greece,” said analysts in the Houston office of Raymond James & Associates Inc. “A 1% rise in the euro added support to commodities, with crude rising 2.4% and natural gas continuing its hot streak and jumping 3.6%.”

In his Oval Office address to the nation on June 15, US President Barack Obama talked tough about ensuring BP PLC pays the full cost of the oil spill caused by the Macondo well blowout in the Gulf of Mexico and pushed his clean energy policy to end US dependence on fossil fuels.

He was to meet June 16 with BP PLC Chairman Carl-Henric Svanberg to pressure BP to set money aside for an independent third party to pay claims against the company resulting from the spill. Senior administration officials said the primary sticking point in fund negotiations was that Obama wants to BP to pay offshore drilling contractors and workers for work lost in the 6-month drilling moratorium he ordered.

Republicans criticized Obama for pushing energy reforms that are certain to increase energy prices and eliminate US jobs.

However, Raymond James analysts said, “The big news last night was not President Obama's speech on the oil spill, but rather yet another increase (this being the fourth one) in the well's flow rate estimate. The new range is 35,000-60,000 b/d, which is up 50% from just last week.” They said, “We project that BP will pay $7.5 billion (net) through yearend 2011 for out-of-pocket costs, including cleanup and well containment. However, this, of course, pales in comparison to the legal liabilities, both civil and criminal. Today we published our initial estimate of these legal costs, totaling $63 billion. One key point is that we assume all the legal liabilities will fall on BP as the operator, i.e. none of it would fall on the other interest holders.”

In that assessment, BP’s net asset value (NAV) decreased from $65 to $43/share. “The stock is trading at 73% of the new NAV, which is not a rich multiple, but we still would not be buyers, in part because the bias on all these cost estimates is upward,” said Raymond James analysts who also reported Hess Corp. “is trading at only 62% of NAV, and obviously without the legal overhang.”

Despite Obama’s speech, analysts said at Pritchard Capital Partners LLC they still expect the moratorium to end “sooner than later.” They said, “Our thesis is that work slowly starts after the 6-month period comes to an end and that the Gulf of Mexico deepwater does not go away for 18-24 months.” They predicted, “All E&P companies operating in the gulf must meet new safety requirements regardless of water depth, and regulations will get tougher as we move forward.”

US inventories
Meanwhile, the Energy Information Administration reported June 16 commercial US crude inventories increased by 1.7 million bbl to 363.1 million bbl in the week ended June 11, compared with a Wall Street consensus for a 1 million bbl decline. US gasoline stocks dropped 600,000 bbl to 218.4 million bbl, while the market expected no change. EIA said distillate fuel inventories climbed 1.8 million bbl to 156.6 million bbl. The Wall Street consensus was for a 1 million bbl increase.

The American Petroleum Institute earlier reported a 579,000 bbl increase in crude stocks to 358.7 million bbl in that same week; a 1.3 million bbl escalation in gasoline inventories to 220.4 million bbl; and a 2.1 million bbl jump in distillate stocks to 153.6 million bbl.

US imports of crude increased by 164,000 b/d to 9.7 million b/d in the latest week. In the 4 weeks ended June 11, EIA reported, US crude imports averaged 9.7 million b/d, up 546,000 b/d from the comparable period in 2009.

The input of crude into US refineries in the latest week dipped by 73,000 b/d to 15.1 million b/d with units operating at 87.9% of capacity. Gasoline production increased to 9.4 million b/d; distillate fuel production decreased to 4.3 million b/d.

Energy prices
The July contract for benchmark US light, sweet crudes gained $1.82 to $76.94/bbl June 15 on the New York Mercantile Exchange. The August contract increased $1.63 to $77.91/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $1.82 to $76.94/bbl. Heating oil for July delivery increased 4.26¢ to $2.07/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 4.51¢ to $2.12/gal.

The July contract for natural gas escalated by 18.3¢ to $5.19/MMbtu on NYMEX. It was “the highest settlement since Feb. 17, on looming hot-weather and short-covering,” said Pritchard Capital Partners. On the US spot market, gas at Henry Hub, La., climbed 15.5¢ to $5.12/MMbtu.

Anuj Sharma, research analyst at Pritchard Capital Partners, reported, “UK natural gas prices increased 7% [June 15] to $6.80/MMbtu and are headed for the biggest second quarter gain on record. However, the premium over NYMEX is likely to limit the LNG imports to the US as prompt-month prices in the UK have already risen 54% since the end of March on declining North Sea supplies, depleted inventories, and higher demand. Natural gas got further support from the data showing manufacturing in the New York region expanded, which lifted the Empire State Manufacturing Index to 19.6 this month from 19.1 in May. However, we expect that the reversal of coal-to-gas switching and rising onshore supplies due to the increase in horizontal gas drilling activity will weigh more on prices after the recent short-squeeze has run its course.”

In London, the July IPE contract for North Sea Brent was up $1 to $76.20/bbl. Gas oil for July gained $2.25 to $655/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 18¢ to $73.17/bbl.

Contact Sam Fletcher at samf@ogjonline.com.