MARKET WATCH: Oil, gas prices fall as trader's optimism again sours

Front-month crude futures fell May 11, giving back some of the gains from the previous session on the New York market as traders continued to blow hot one day, and cold the next on the European debt crisis.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 12 -- Front-month crude futures fell May 11, giving back some of the gains from the previous session on the New York market as traders continued to blow hot one day, and cold the next on the European debt crisis.

Natural gas declined, too, but still held above $4/MMbtu. “Natural gas continues to stubbornly trade above [that] level despite record storage levels and an increasingly oversupplied market,” said analysts in the Houston office of Raymond James & Associates Inc.

They noted West Texas Intermediate “is currently trading at a $5/bbl discount to [North Sea] Brent.” Raymond James analysts said, “This is partially the fault of bloated inventories at Cushing[, Okla.]” Meanwhile, energy company stocks did not move much but followed the broader market a bit lower, they said. Both oil and gas prices were up in early trading May 12.

In New Orleans, analysts at Pritchard Capital Partners LLC said, “The euro fell 0.9% against the dollar on concern that the European plan does not do enough to provide a structural solution for deficit problems faced by Greece, Spain, and Portugal. The crude market looked through an otherwise bullish report showing that Chinese refining increased by 17% to a record in April on strength of domestic demand. The prevailing concerns about European debt-woes coupled with the high inventory levels, have pushed the spread between July and June contracts to $3.85/bbl, the biggest difference between prompt month contracts since February last year.”

In its latest monthly oil market report, the Paris-based International Energy Agency reduced its 2010 estimate of global oil demand by 220,000 b/d to 86.4 million b/d. However, that’s still 1.62 million b/d above last year’s total demand.

IEA’s estimate of global supply and demand “calculates to further stock builds in 2010, and since that comes on top of already high stock levels, that should not help to reduce the global contangos,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “Floating stocks have increased by 4 million bbl during April, according to the IEA, with an increase of 16 million bbl in crude oil (mostly Iranian crude oil) offsetting a decrease of 12 million bbl in products.”

Political factors
In a May 11 hearing, US senators “mindlessly blasted” BP PLC and its contractors over the Macondo blowout in the Gulf of Mexico, said Raymond James analysts. The analysts advised investors “to keep an eye on BP's [pending] second attempt to lower a containment box onto the leaking oil well.” They said, “Any success slowing the leak will be considered very positive for the industry.”

Meanwhile, with the “‘no new permits or rig moves in the Gulf of Mexico’ rant occurring,” Pritchard Capital Partners expect exploration and production companies with primary holdings in the gulf will continue to underperform the market. As an alternative, they recommend investors put their money in companies active in the Bakken shale.

Separately, conservative leader David Cameron became prime minister of the UK, taking over the post from the Labor Party, which held it for 13 years. The “libertarian-leaning” Liberal Democrats joined the ruling coalition as junior partner. “During the campaign, neither party has called for any major changes in oil and gas policy,” said Raymond James analysts. However, they noted, “Both tend to be more pro-business than Labor, and the Conservatives in particular have been calling for a broad-based corporate tax cut (possibly from 28% to 25%). This would modestly benefit producers in the North Sea's UK sector, though the supplementary North Sea tax is set to remain in place.”

US inventories
The Energy Information Administration said May 12 commercial inventories of US crudes gained 1.9 million bbl to 362.5 million bbl in the week ended May 7, a little above the Wall Street consensus for an increase of 1.6 million bbl. Gasoline stocks were up 2.8 million bbl to 222.1 million bbl in the same week, far exceeding market expectations of a 400,000 bbl build. Distillate fuel inventories increased 1.4 million bbl to 153.8 million bbl, slightly higher than the anticipated 1.2 million bbl increase.

The American Petroleum Institute earlier reported a 362,000 bbl increase in US crude inventories to 364.3 million bbl. Gasoline dropped 906,000 bbl to 220.4 million bbl, API said. Distillate fuel gained 94,000 bbl to 146.97 million bbl.

Imports of crude into the US were down by 264,000 b/d to 9.7 million b/d, according to the EIA. In the 4 weeks through May 7, crude imports averaged 9.7 million b/d, up 538,000 b/d above the comparable period a year ago.

The input of crude into US refineries declined by 110,000 b/d to 15 million b/d in the week, with units running at 88.4% of capacity. Gasoline production decreased to 9 million b/d while distillate fuel production increased to 4.3 million b/d.

Energy prices
The June contract for benchmark US light, sweet crudes dropped 43¢ to $76.37/bbl May 11 on the New York Mercantile Exchange. The July contract declined 30¢ to $80.22/bbl. Subsequent months posted gains, however. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 43¢ to $76.37/bbl. Heating oil for June delivery increased 1.99¢ to $2.14/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month gained 2.26¢ to $2.20/gal.

The June contract for gas fell 3.9¢ to $4.13/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., escalated 9¢ to $4.19/MMbtu.

In London, the June IPE contract for North Sea Brent was up 37¢ to $80.49/bbl. Gas oil for May gained $5.50 to $677.25/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes dropped 55¢ to $77.53/bbl.

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