MARKET WATCH: Oil, gas post biggest price gains in weeks

On May 10, the front-month crude contract regained most of its loss from the previous session, posting the biggest gain since Apr. 29 on the New York market after the European Union put together a $962 billion emergency loan to rescue Greece and other financially pinched countries in the euro zone.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 11 -- On May 10, the front-month crude contract regained most of its loss from the previous session, posting the biggest gain since Apr. 29 on the New York market after the European Union put together a $962 billion emergency loan to rescue Greece and other financially pinched countries in the euro zone.

Amid the market euphoria, natural gas posted its biggest gain in more 2 weeks.

Nonetheless, energy prices were down slightly in early trading May 11 as the euro again dropped against the dollar “on concerns that the European debt bailout may not be sufficient to end the debt crisis in the region,” said analysts at Pritchard Capital Partners LLC in New Orleans.

The EU plan “is basically diluting the debt problems of a few countries to the rest of Europe,” said Olivier Jakob at Petromatrix in Zug, Switzerland. “If the 2008 crisis originated in greed in the private sector, the 2010 European crisis is originating from greed in the public sector. European politicians are going on the stage to blame the ‘wolves’ and the ‘speculators’ while the audience is blaming the politicians for having no control in the corrupted practices of the countries that are at the source of the current mess.”

As a result of the loan package, Jakob said, “The German chancellor suffered a political blow over the weekend, and if the European plan will reduce the systemic risk on Europe, it does not necessarily strengthen it either economically or politically and does not make the euro a safer haven than the dollar.”

Pritchard Capital Partners said, “It might take a while before prices touch $87/bbl again, as we expect that the high inventory levels will mute investor exuberance and will keep the crude market more grounded in the fundamentals.”

They said, “Although natural gas markets have been seeing strong demand from power and industrial consumers, we believe that the supply glut will keep prices under pressure as the horizontal gas rig count has continued to rise steadily and is currently sitting at 597, an all-time high.” The total number of US rigs drilling for gas declined by 5 last week. “However, the pull back so far has mostly been confined to the vertical gas rigs while highly efficient horizontal gas rigs, largely drilling for shale gas, continue to increase,” Pritchard Capital analysts reported.

Oil prices also were buoyed by reports crude imports into China reached a record level of 5.13 million b/d in April, said analysts in the Houston office of Raymond James & Associates Inc.

Jakob observed, “The US Gulf crude oil differentials are now trading at a strong premium to West Texas Intermediate (a gain of $5.30/bbl since early April) and will weigh against the refinery processing margins. The Saudis are surely not regretting their decision to have switched at the start of the year their US crude benchmark from WTI to US Gulf crude oil.”

Macondo hearing
A Senate committee hearing on the Macondo blowout in the Gulf of Mexico opened May 11. Pritchard Capital Partners observed, “While finger-pointing and grandstanding by certain senators is amusing to watch and generally worthless, today may not be. Evidence and data is being corralled that is proving useful to analysis, and it appears that most of the blame falls on BP PLC and the Minerals Management Service, not the service companies.”

Analysts at FBR Capital Markets & Co. in Arlington, Va., were more upbeat in their outlook, with business executives’ testimony marking “a turning point” for contractors Transocean Ltd. and Halliburton Co.

“The executives from these companies should shed additional light on the causes of the tragic blowout at BP's Macondo well,” said FBR analysts. “The net result of these hearings will likely be a more intense scrutiny of BP as the operator and decreased focus on BP's subcontractors on this well. As both Halliburton and Transocean point out in their prepared remarks, they worked at the direction of BP.”

FBR analysts noted, “The process of constructing a well can be quite complex, and the relevance of certain procedures like running and cementing casing is not fully appreciated by many investors.” That “lack of understanding” contributed to the recent slide in stock prices for those companies. “Starting today, we will have public testimony explaining these complex procedures in plain language that will be widely watched and analyzed by investors.”

Like other industry observers, FBR analysts said, “The well should have been safe. A wellbore that has been cased, cemented, and sealed with a subsea well head is supposed to be completely safe. At this stage of well construction, there should be no risk of a catastrophic blowout, yet that is exactly what occurred at Macondo. Either the seal created by the casing (solid metal pipe), or the subsea wellhead assembly must have failed. In either case, we are talking about the failure of a solid metal component that allowed this blowout to start.” It’s a detail “that is often misunderstood but should become increasingly appreciated as the hearings progress,” they said.

Meanwhile, FBR analysts see “increased interest, in particular by value-oriented investors, in Transocean and Halliburton. The general consensus of the conversations we have had is that the stocks are cheap, but that an overhang is likely to persist. As the public hearings progress, we believe investors will become increasingly comfortable that the responsibility for this tragic event lies with BP, both contractually and according to law.”

OPEC’s outlook
In its latest monthly report, the Organization of Petroleum Exporting Countries said, “The global economy is improving, but the challenges of sovereign debt in the developed countries, the ability of China to avoid overheating [its economy], and persistently high unemployment levels need careful monitoring.” China has been among the main drivers behind oil demand growth this year and should continue “despite the recent price increase in its gasoline and diesel retail sales by 4.5% and 5% respectively,” OPEC officials said.

They said, “Increased product demand in tandem with improving economic growth has overshadowed other bearish developments in the product markets, including the volcano eruption in Iceland and its negative impacts on the aviation industry and jet fuel demand. This situation has also reinforced product market sentiment and lifted refining margins across the board, with the exception of Europe.”

Despite the recent improvement in refinery operations and margins, OPEC said, “It appears that due to persisting interproduct imbalances and ample stocks of light products, the risk of a downward correction in refinery operations is very high. As a result, product markets are not likely to provide sufficient support for crude market fundamentals in the near future.”

In its latest report, OPEC increased its estimate of 2009 demand for its oil by 20,000 b/d to 29 million b/d, down 2.4 million b/d from 2008 levels. It raised its 2010 estimate by 40,000 b/d to 28.8 million b/d.

Energy prices
The June contract for benchmark US sweet, light crudes traded as high as $78.51/bbl May 10 on the New York Mercantile Exchange before closing at $76.80/bbl, up $1.69 for the day. The July contract regained $2.01 to $80.52/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.69 to $76.80/bbl. Heating oil for June delivery increased 4.07¢ to $2.12/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month advanced 4.75¢ to $2.17/gal.

The June contract for natural gas continued climbing, up 15.5¢ to $4.17/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 16.5¢ to $4.10/MMbtu.

In London, the June IPE contract for North Sea Brent rose $1.85 to $80.12/bbl. Gas oil for May escalated by $14 to $671.75/tonne.

The average price for OPEC’s basket of 12 benchmark crudes gained $1.67 to $78.08/bbl.

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