MARKET WATCH: Court order, fewer home sales cut oil prices

The surprise ruling June 22 by a New Orleans federal judge lifting the 6-month deepwater drilling moratorium sent crude prices lower in the New York market, extending declines that began with an unexpected drop in existing US home sales.

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 23 -- The surprise ruling June 22 by a New Orleans federal judge lifting the 6-month deepwater drilling moratorium sent crude prices lower in the New York market, extending declines that began with an unexpected drop in existing US home sales.

“On the last day for the July contract, oil fell 0.8% while the August contract was down 1%. That, coupled with a 2.3% drop in natural gas despite forecasts for higher temperatures, had energy names underperforming the broader market,” said analysts in the Houston office of Raymond James & Associates Inc.

Offshore driller stocks initially rallied on the news of the court ruling. However, Raymond James reported, “The gains quickly dissipated as the White House immediately announced plans to appeal the decision as well as implement a new drilling moratorium considered to be ‘within their authority.’ The good news for the industry is that the appeal will be heard by the Fifth Circuit, which typically ranks as one of the most conservative of the federal appellate courts.”

Nevertheless, said Raymond James analysts, “There is certainly no assurance that the district court's ruling will be upheld. Either way, we wouldn't be surprised if this issue ultimately ends up in the Supreme Court, which of course would mean more delays until a definitive conclusion.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Natural gas fell for the third consecutive day as cooler than previously anticipated temperatures have prevailed reducing summer cooling demand.” He said, “The market is now looking towards the start of a hyperactive hurricane season with the first named tropical storm already expected to form over the Northwestern Caribbean later this week. We believe that only major hurricanes, which could disrupt a large portion of Gulf of Mexico supplies, would be supportive to prices as smaller storms are likely to instead reduce cooling demand in the Gulf Coast region.”

While the federal judge’s preliminary injunction against the moratorium will not trigger immediate resumption of drilling, said analysts at FBR Capital Markets & Co. in Arlington, Va., “We believe the ruling has several important impacts on the offshore industry. First, we believe that in explaining its rationale, the Department of Interior could parse out which deepwater activities are appropriate for the moratorium and which may have less risk.

“Second, the lifting of the moratorium and any subsequent change of approach by the government would seem to make moot the attempted cancellation of drilling rig contracts by select operators. With the blanket moratorium lifted, virtually all drilling rig contracts would seem to be fully enforceable and not subject to cancellation under force majeure clauses. Even now, several drillers have presented compelling arguments as to how the prior moratorium did not prevent use of the rig for alternate activities or in other markets.”

FBR Capital analysts said, “Based on our industry experience and contacts, we believe that it is incredibly important that the administration not create the impression that the deepwater moratorium is open-ended. Should major deepwater operators in the US gulf come to this conclusion, then we have no doubt that nearly all of the deepwater rigs currently in the gulf would leave for other markets and not return for years. We estimate this result would lead to the loss of as many as 50,000 to 75,000 high-paying jobs, lost royalties, and increased reliance on foreign oil.”

US inventories
The Energy Information Administration said June 23 commercial US crude inventories increased 2 million bbl to 365.1 million bbl in the week ended June 18. The Wall Street consensus was for an 800,000 bbl draw. Gasoline stocks decreased by 800,000 bbl to 217.6 million bbl, exceeding expectations for a 200,000 bbl decline. Distillate fuel inventories increased 300,000 bbl to 156.9 million bbl, far short of an anticipated gain of 1.5 million bbl.

The American Petroleum Institute earlier reported US crude stocks climbed by 3.7 million bbl to 362.4 million bbl. Gasoline inventories were up 810,000 bbl to 221.2 million bbl. Distillate stocks escalated by 1.1 million bbl to 154.7 million bbl, API said.

EIA said imports of crude into the US increased by 413,000 b/d to 10.1 million b/d in the week ended June 18. In the 4 weeks through that date, crude imports averaged 9.7 million b/d, up 466,000 b/d from the comparable period in 2009.

Input of crude into US refineries increased 77,000 b/d to 15.2 million b/d in the latest week, with units operating at 89.4% of capacity. Gasoline production decreased to 9.3 million b/d. Distillate fuel production increased to 4.3 million b/d.

Energy prices
The July contract for benchmark US light, sweet crudes dropped 61¢ to $77.21/bbl June 22 on the New York Mercantile Exchange. The August contract fell 76¢ to $77.85/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 61¢ to $77.21/bbl. Heating oil for July delivery lost 3.3¢ to $2.11/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 0.93¢ to $2.13/gal.

The July natural gas contract fell 11.7¢ to $4.76/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 31.5¢ to $4.86/MMbtu.

In London, the August IPE contract for North Sea Brent crude declined 78¢ to $78.04/bbl. Gas oil for July dropped $7.50 to $682.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down 85¢ to $75.11/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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