MARKET WATCH: Gas prices rally; crude prices fall

Natural gas prices continued to rally May 13, but tightening storage capacity pushed the front-month crude contract down 1.7% in the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 14 -- Natural gas prices continued to rally May 13, but tightening storage capacity pushed the front-month crude contract down 1.7% in the New York market.

“Of course, Europe did not help as Portugal announced austerity measures aimed at curbing its budget deficit, sending the dollar up 0.5% on the euro and adding pressure to crude prices,” said analysts in the Houston office of Raymond James & Associates Inc.

“Inventories at Cushing, Okla., continue to set new records as it rose 784,000 bbl to 37 million bbl in the week ended May 7, driving the front 2 months spread to $4.59, the widest divergence between the front month contracts since February last year. High inventory levels have also driven the spread between June and December contracts wider, which is now at $10.44,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “We believe that the widening spread will encourage buyers to store crude for forward delivery and will provide price support at these levels. However the euro-dollar relationship, which is largely being driven by the events in Europe, will continue to call the shots in the near term.”

High and rising levels of US oil inventories “will create downside risk for oil prices in the coming months,” said Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC. “High inventories were less of a threat to the market when the trend was falling, but stocks are now rising and contango is exacerbating the situation,” he said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Pension funds and asset managers have been piling up into West Texas Intermediate-linked commodity indices and exchange traded funds to have exposure to the Shanghai oil demand in 2020, but with the wider WTI contango they will increasingly realize that they have instead bought prompt exposure to a local US market in 2010.”

He said, “With the continued shift in the oil infrastructure of the US Midwest (increased storage capacity, increased Canadian pipeline capacity, increased domestic production) the WTI contract will continue to be less sensitive to world events. The danger is to look at the historic charts on the WTI time spread or on the WTI-Brent spread and assume that they will return to the historical mean. The US Midwest oil infrastructure in 2011 will be materially different to the infrastructure of 2001, hence risk managers need to stress relative trades on WTI outside of the mean-reverting assumption.”

The declining trend in Organization for Economic Cooperation and Development crude and product inventories evident in 2009 “has clearly reversed,” Sieminski said. “This bearish development has some offset in the fact that China product demand appears to be holding up. We also observe that natural gas has been gaining market share in US electricity generation—mostly at the expense of coal.”

He said, “April oil data for China indicates sustained robust apparent demand growth of 13% year-on-year, based on preliminary figures. Most notable in the April China data set was refinery runs, which hit a new record of 8.4 million b/d. China’s crude oil imports also hit a record of 5.2 million b/d, representing 57% of China’s total crude supply and reflective of the country’s increasing dependence on foreign oil. In terms of self sufficiency, China and the US are nearly equals as imports represent more than 60% of total US crude supply.”

Natural gas
Gas futures prices continued a week-long rally after the Energy Information Administration reported the injection of 94 bcf of natural gas into US underground storage in the week ended May 7. That pushed working gas in storage above 2 tcf. That’s well beyond normal levels for the time of year, up 97 bcf from the comparable period a year ago and 325 bcf above the 5-year average.

The latest injection was below the Wall Street consensus “mainly due to higher demand from the power and industrial sector. We would be looking for some pull back in prices at these levels until more cooling demand shows up,” Sharma reported.

Sieminski said, “Natural gas is slowly but methodically increasing its market share of the electricity generation market. This year, high coal prices and low hydro output are boosting gas use in the power sector.”

Energy prices
The June contract for benchmark US light, sweet crudes traded as low as $73.62/bbl May 13 before closing at $74.40/bbl, down $1.25 for the day on the New York Mercantile Exchange. The July contract lost $1.16 to $78.99/bbl. Prices for subsequent monthly contracts also fell. On the US spot market, WTI at Cushing was down $1.25 to $74.40. Heating oil for June delivery fell 2.72¢ to $2.13/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month declined 1.53¢ to $2.20/gal.

The June natural gas contract gained 5.5¢ to $4.34/MMbtu on NYMEX—“the highest settlement since March 16,” said Sharma. Raymond James analysts said, “This week prices are up 8%.” On the US spot market, gas at Henry Hub, La., was up 6¢ to $4.26/MMbtu.

In London, the June IPE contract for North Sea Brent crude dropped $1.09 to $80.11/bbl. The new front-month June contract for gas oil advanced by $4 to $682.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 14¢ to $78.43/bbl.

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