MARKET WATCH: Natural gas, crude oil prices rally

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 4 -- Energy prices gathered momentum June 3 and climbed higher for the second consecutive day, with natural gas up 6% and the front-month crude price again testing the $75/bbl level in the New York market.

“Despite a flat broader market, energy stocks across the board landed in positive territory (except for coal stocks),” said analysts in the Houston office of Raymond James & Associates Inc. The improved equity market was primarily the result of the hike in gas prices after the Energy Information Administration reported a smaller-than-expected injection of 88 bcf of natural gas into US underground storage in the week ended May 28 (OGJ Online, June 3, 2010). EIA also reported commercial US inventories of crude fell 1.9 million bbl to 363.2 million bbl in that week. Gasoline stocks dropped 2.6 million bbl to 219 million bbl. Distillate fuel inventories increased by 500,000 bbl to 153 million bbl.

“Total fuel demand rose above 20 million b/d for the first time since the beginning of last year to average 19.7 million b/d over the 4 weeks ended May 28, an increase of 8.1% year-over-year,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “Gasoline consumption rose 0.8% from the week prior to 9.17 million b/d, an increase of 1.7% year-over-year. Signs of strengthening recovery boosted the prices further as the initial jobless claims fell by 10,000 to 453,000 while consensus was for a drop of 8,000.”

Crude prices also got a boost from false rumors that the federal drilling ban in the gulf had been extended to waters less than 500 ft. deep, triggering a rollercoaster ride for drilling contractors with jack up rigs in the gulf. Corporate stocks for contractors with jack up fleets “were ripping” in early trading “as the return of shallow-water permitting was more fully understood.” However, Raymond James analysts reported, “This changed around lunch time, when erroneous reports stated the deepwater moratorium was extended to shallow water as well (jack ups fell as much as 20% on the news).”

They said, “The rumors appear to have originated from e-mails sent by the Interior Department's Mineral Management Service to companies seeking shallow-water permits that requested they ‘hold off until the department issues new guidelines.’ Later in the day, the agency confirmed that offshore projects in less than 500 ft of water will still be allowed.”

However, requiring resubmission of drilling plans that detail how new safety and environmental regulations will be met “could cause a pause in shallow water activity for a couple of months,” they said.

Sharma reported, “Strengthening coal prices have also been supportive…by pushing the coal-to-gas switching parity price higher. We estimate that for every dollar increase in Central Appalachian coal price, coal-to-gas switching floor moves up by approximately 6¢. We believe that although the supply glut would be weighing on prices, natural gas will continue to find support from strengthening economic recovery, which will result in higher industrial demand, increased summer cooling demand, projections of hyperactive hurricane season, a possible 500 MMcfd decline in supplies from the gulf due to the deepwater drilling moratorium, and the fuel switching-induced electric demand.”

Oil and gas prices were slightly down in early trading June 4.

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “China reduced gasoline and diesel prices as of the start of June. With runs expected to stay high and more new refinery capacity to come online this year, demand for crude is likely to be sustained. Strategic Petroleum Reserve stockpiling may also add to incremental import demand in 2010.”

He added, “US coal prices have been climbing since the end of 2009, considerably narrowing the gap to Henry Hub[, La.] gas. We suspect this is a key explanation for why gas storage balances have been improving.”

Energy prices
The July contract for benchmark US light, sweet crudes traded as high as $74.95/bbl during the June 3 session before closing at $74.61/bbl, up $1.75 for the day. It was “the highest close since May 12” on the New York Mercantile Exchange, said Sharma.

The August contract advanced $1.55 to $76.05/bbl. On the US spot market, West Texas Intermediate at Cushing was up $1.75 to $74.61/bbl. Heating oil for July delivery increased 3.32¢ to $2.04/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 5.51¢ to $2.08/gal.

The July natural gas contract escalated by 26.6¢ to $4.69/MMbtu on NYMEX. On the US spot market, gas at Henry Hub regained 13.5¢ to $4.46/MMbtu.

In London, the July IPE contract for North Sea Brent crude increased $1.66 to $75.41/bbl. Gas oil for June recouped $1.50 to $638.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was up $1.71 to $72.86/bbl.

Contact Sam Fletcher at samf@ogjonline.com.