MARKET WATCH: Diminished storm threat reduces energy prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, June 29 -- Austerity promises by the Group of 20 (G20) governments meeting June 26-27 in Toronto, lower consumer confidence expectations, and reduced threat by Tropical Storm Alex to production facilities in the Gulf of Mexico reduced the front-month crude contract 1% June 28 in the New York market, ending a 2-day rally.

“After keeping global economies on a sugar high of stimulus for the better part of 2 years now, the G20 nations vowed to cut deficit spending in developed countries in order to avoid a [recessionary] double dip,” said analysts in the Houston office of Raymond James & Associates Inc.

They said, “Alex-inflated natural gas prices also closed down 3% as the storm headed west, in addition to cooler-than-normal weather tempering natural gas demand expectations. The broader markets outperformed energy stocks, with the Dow Jones Industrial Average and Standard & Poor’s 500 index closing just lower but above the Oil Service Index (down 1.1%) and the S&P 1500 Exploration & Production subindustry index (down 1.9%).” The price of crude was down 1.8% in early trading June 29 and the broader markets also were down after reports that the Chinese leading economic index was revised down to show the smallest gain in 5 months.

New projections showed TS Alex will move across the southern gulf “sparing not only the Macondo spill area but most of the gulf production region as well,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “The dollar’s 0.7% gain against the euro weighed further on prices.”

More signs of a continuing recovery as positive consumer sentiment data June 25 were followed by strong consumer spending figures June 28. “Consumer spending in the US grew by 0.2% in May vs. the consensus of 0.1%. We continue to believe that elevated inventory levels will weigh on prices keeping them range-bound in the near term,” Sharma reported.

Struggling commodities
Meanwhile, Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “Commodities hold the distinction of being the worst performing asset class in the first 6 months of 2010 when measured on a total returns basis. We believe commodities will continue to struggle over the summer, but expect price rallies to become more sustainable heading into next year.”

Oil prices should be soft in the third quarter as sovereign debt and bank credit issues create growth worries, but a gradual tightening of oil market fundamentals should begin later this year and continue into 2011 “when we expect oil price rallies above $80/bbl will become more sustainable,” Sieminski said.

He added, “We expect some deceleration in economic growth in Asia, [but] we believe the recovery in US industrial activity will continue. If this bears out, it indicates a more balanced gasoil demand growth picture globally and should prove supportive for gasoil prices.”

Although horizontal drilling continues to rise, Sieminski said, “The gas rig count is finally showing signs of leveling off. With the US economy recovering, we expect demand should support average prices of $6/MMbtu in 2011.”

In other news, Pritchard Capital Partners reported, “Our math leads us to believe that the interception of the relief well with the [Macondo well] casing is 8-10 days away, and with success rates very high once intercepted, the oil could stop flowing relatively quickly after that event. Although the operator is conservatively saying August, discussions with experts in well control and relief operations have us convinced that the probability is high that Macondo is no longer flowing within a fortnight, setting up a nice rally for energy as a whole.”

Energy prices
The August contract for benchmark US sweet, light crudes dropped 61¢ to $78.25/bbl June 28 on the New York Mercantile Exchange. The August contract fell 53¢ to $78.90/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 61¢ to $78.25/bbl. Heating oil for July delivery declined 1.89¢ to $2.09/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 3.02¢ to $2.14/gal.

The July natural gas contract fell 14.4¢ to $4.72/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was unchanged at $4.84/MMbtu.

In London, the August IPE contract for North Sea Brent crude was down 53¢ to $77.59/bbl. Gas oil for July gained $5.25 to $670.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 87¢ to $74.69/bbl.

Contact Sam Fletcher at samf@ogjonline.com.