MARKET WATCH: Crude price rebounds above $71/bbl

After 2 weeks of near free-fall, energy prices increased across the board May 26 in the New York market along with an early rally in the equities market, with crude finishing above $71/bbl.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 27 -- After 2 weeks of near free-fall, energy prices increased across the board May 26 in the New York market along with an early rally in the equities market, with crude finishing above $71/bbl.

“Luckily commodity exchanges close an hour and a half before the New York Stock Exchange bell, as reignited euro zone worries took the broader markets from an early rally to a late trading collapse (-0.7%),” said analysts in the Houston office of Raymond James & Associates Inc. “Additionally, crude was spurred on by strong manufacturing data despite a larger than expected build in petroleum inventories” earlier reported by the US Energy Information Administration.”

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said the front-month crude contract surged by 4% to post “the biggest 1-day gain since Sept. 30,” due to “the improving economic outlook and higher fuel consumption, which increased 0.6% to 19.7 million b/d in the week that ended May 21.” He said, “Additionally, inventory declines at Cushing, Okla., were observed for the first time in 10 weeks, dropping 0.9% to 37.6 million bbl.”

He added, “Demand for distillate fuel, including diesel and heating oil, increased to its highest level since March 2009.” Crude was up 2% in early trading May 27, while natural gas made modest gains.

However, Olivier Jakob at Petromatrix, Zug, Switzerland, warned, “There is no global move back to risk, and we should therefore be careful in being too enthusiastic about the positive price action in oil yesterday. The market volatility index (VIX) was slightly weaker, but when we look at the patterns on the Standard & Poor’s 500 index and the euro-yen, we start to believe that the VIX could be set for a rebound, which will then be negative for the flat price of West Texas Intermediate.”

The US stock cushion is exceptionally high “and is still not coming off,” Jakob cautioned. “This is not positive and will be problematic for the refinery margins going forward as there is simply still too much supply.”

Gasoline stocks also are not coming off “by any significant number and with imports at 1.1 million b/d there is no real supply concern for the driving season as the days of cover are at the highest level since 2002,” he said. “Stocks of high-sulfur heating oil were off for a second week in a row, but they are so much above the levels of last year that it can also not be a cause of concern.”

Jakob said, “Globally, US oil product demand is much stronger than a year ago and is closing in to the levels of 2007. The problem, however, is that there is enough spare capacity to have a supply increase that is a match to the oil demand increase and that will result in no stock draw. As long as this situation persists (and there is still ample spare capacity available), the oil system is not being forced into stock draws, and that will continue to be a capping factor to oil rallies.”

Meanwhile, Sharma said, “We believe that China maintaining its commitment to investments in European sovereign debt is a positive step towards easing uncertainties in the market. Overall, we feel positive about the economic recovery; however, the effects of the ongoing European debt crisis are yet to be reflected in US economic indicators.”

Energy inventories
EIA said commercial US inventories of crude grew by 2.4 million bbl to 365.1 million bbl in the week ended May 21. Gasoline stocks in the same period decreased by 200,000 bbl to 221.6 million bbl. Distillate fuel inventories dropped 300,000 bbl to 152.5 million bbl (OGJ Online, May 26, 2010).

On May 27, EIA reported the injection of 104 bcf of natural gas into US underground storage in the week ended May 21. That brought working gas in storage to 2.3 tcf, up by 71 bcf from the comparable period in 2009 and 318 bcf above the 5-year average.

The price of natural gas was up May 26 “on strong cooling demand due to higher than normal temperatures in the Northeast and north-central US.” Sharma said, “A fading El Nino has the potential to cause a more active hurricane season and a hotter than normal summer, which would be supportive to natural gas prices.” He said, “We believe that prices would continue to find support from strong cash demand going into the Memorial Day weekend.”

Apparently the market expects the drilling permit moratorium soon will be lifted for shallow-water projects. “We are…in this camp,” said Sharma, “but also would note that increased regulations that lead to higher costs to drill offshore, regardless of water depths, will affect the returns of shelf drilling and likely lead to decreasing investment in the shelf. As the breakeven gas price increases with cost increases and [rates of return] are sub-par compared to US land plays, we don’t expect a massive snap-back in drilling activity.”

Energy prices
The July contract for benchmark US sweet, light crudes regained $2.76 to $71.51/bbl May 26 on the New York Mercantile Exchange. The August contract climbed by $2.44 to $72.54/bbl. On the US spot market, WTI at Cushing was up $2.76 to $71.51/bbl. Heating oil for June delivery advanced 4.9¢ to $1.92/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 3.96¢ to $1.97/gal.

The June natural gas contract escalated by 10.4¢ to $4.16/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped 22.5¢ to $4.21/MMbtu.

In London, the July IPE contract for North Sea Brent crude gained $2.19 to $71.74/bbl. Gas oil for June rose $16.50 to $609/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased $1.37 to $68.21/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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