MARKET WATCH: Energy prices climb for second day; crude above $74/bbl

Energy prices continued climbing May 27 with crude up 4.3% in the New York market after China reaffirmed its commitment to its European assets and boosted optimism for an economic recovery.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 28 -- Energy prices continued climbing May 27 with crude up 4.3% in the New York market after China reaffirmed its commitment to its European assets and boosted optimism for an economic recovery. The equity markets also rose.

China’s statement “gave the euro a much-needed boost, up 1.5% on the dollar after 4 straight days of declines,” said analysts in the Houston office of Raymond James & Associates Inc. “Natural gas rose 2.8% after the National Oceanic and Atmospheric Administration predicted a busy hurricane season.” The gas price jump came despite the Energy Information Agency’s report of a bigger-than-expected 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 (OGJ Online, May 27, 2010).

Hurricane activity this year “could lead to the possible loss of 90 bcf of natural gas [production],” said Adam Sieminski, chief energy economist, Deutsche Bank. “In our view, this would be bullish for the storage outlook and natural gas prices, which tend to move higher and remain elevated for longer compared to crude oil in the aftermath of hurricanes hitting US landfall.”

US President Barrack Obama’s decision to extend the moratorium on new deepwater permits through the end of the year is “a negative for all deepwater drillers, and the stocks reflected this yesterday afternoon,” said Raymond James analysts (OGJ Online, May 27, 2010). “While exploration and production companies will try to work with drillers and spread the pain (lower day rates, move rigs internationally), some smaller operators may be forced to declare force majeure, whereby the contract can be cancelled.”

In addition to the White House's cancellation of new lease sales and the extension for 6 months of the moratorium on all new deepwater drilling, Interior Secretary Ken Salazar unexpectedly announced the ban of all currently drilling deepwater exploration rigs, “requiring 33 operators to pull up from current prospects (for an < amount of time) and implement new safety measures,” they said. “Though our conversations led us to believe that future drilling would certainly be banned in the near term, most operators assumed that all current projects would be allowed to continue with business as usual.”

As expected, the ban does not apply to rigs operating in shallow waters, though the ‘deepwater’ has been defined in this case as water depths of over 500 ft (traditionally defined as 1,000 ft or deeper),” Raymond James analysts reported. “It also does not specify which measures or how long the safety measure implementation process is expected to take.”

It appears the moratorium for jack up rigs could be lifted in coming months. If so, Raymond James said, “Look for Gulf of Mexico jack up companies to spike higher. Additionally, with the deepwater off limits until at least 2011, some operators may shift incremental [capital expenditures] to the Gulf of Mexico shelf, particularly the deep shelf.”

Moreover, analysts said, “The corresponding reduction in US oil production should bolster worldwide crude prices, which in turn should increase international jack up demand. Bottom line: While deepwater drillers will be negatively impacted, we believe jack up drillers with top-of-the-line equipment could actually benefit, both here and overseas.”

Sieminski estimated the shutdown of deepwater exploration in the gulf “could cut US oil production by 160,000 b/d in 2011.”

In other news, the upcoming last weekend of May with the Memorial Day holiday marks the start of the traditional US summer driving season. “While we are expecting US gasoline demand growth to be positive this summer, we believe it will remain weak at just 1% year-over-year reflecting ongoing concerns about job growth prospects,” Sieminski said.

Energy prices
The July contract for benchmark US light, sweet crudes jumped $3.04 to $74.55/bbl May 27 on the New York Mercantile Exchange. The August contract escalated by $3.08 to $75.62/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $3.04 to $74.55/bbl. Heating oil for June delivery gained 7.87¢ to $2/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 6.85¢ to $2.04/gal.

The new July natural gas contract advanced 11.5¢ to $4.29/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 3¢ to $4.24/MMbtu.

In London, the July IPE contract for North Sea Brent crude gained $2.92 to $74.66/bbl, narrowing its premium over WTI. Gas oil for June increased $24 to $633/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained $2.27 to $70.48/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

More in Economics & Markets