MARKET WATCH: European fears undermine crude prices; gas price rises

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 26 -- Oil prices again dropped May 25 in the New York market amid continued fears that Europe’s financial hardships may undermine recovery from the global recession, but the natural gas futures price rose for the first time in six sessions.

“Oil prices fell 2% despite a late comeback in the afternoon as the dollar fell and coinciding with the late session broader market rally,” said analysts in the Houston office of Raymond James & Associates Inc. “Gas prices closed the day higher (up 0.8%) as warmer weather increased demand.”

The US dollar strengthened against the euro “on concerns about the weakness of Spanish savings banks…and heightened tensions between North and South Korea,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston.

Sharma reported, “Tensions are rising within the Organization of Petroleum Exporting Countries, with more push for the quota compliance rather than holding another meeting to address the recent decline in prices. The Angolan oil minister hinted last week that the group members may call an extraordinary meeting if the price-drop continues, but the Kuwaiti, Qatari, and Saudi officials have signaled that they are not yet concerned enough to feel the need for an emergency meeting. We believe that the lack of consensus within OPEC is not good for prices at a time like this when the market is desperately looking for stable ground.”

Energy markets will be closed May 31 for the Memorial Day, “hence book squaring for the end of the month and in front of the long weekend will add some additional price uncertainty,” said Olivier Jakob at Petromatrix, Zug, Switzerland.

Higher consumer optimism is expected to result in more industrial demand for natural gas “although the European debt-crisis may dent the US recovery since lower European growth and the strengthening dollar would undermine US exports, affecting the domestic natural gas market,” Sharma said. “We believe increased cooling demand due to warmer than normal weather in the Northeast and north-central region will continue to provide support to prices during the week,” he said.

US inventories
The Energy Information Administration said May 26 commercial US inventories of crude grew by 2.4 million bbl to 365.1 million bbl in the week ended May 21, surpassing Wall Street’s projection that stocks would be flat. Gasoline stocks in the same period decreased by 200,000 bbl to 221.6 million bbl against analysts’ expectations of a 100,000 bbl increase. Distillate fuel inventories dropped 300,000 bbl to 152.5 million bbl, disappointing the Wall Street consensus for a gain of 200,000 bbl.

The American Petroleum Institute earlier reported a 616,000 bbl increase in US crude stocks to 364.1 million bbl. Gasoline inventories fell 3.2 million bbl to 218.2 million bbl. Distillate stocks gained 1.5 million bbl to 148.2 million bbl, API said.

EIA reported imports of crude into the US were up 99,000 b/d to 9.9 million b/d in that same week. Over the 4 weeks through May 21, US crude imports averaged 9.8 million b/d—843,000 b/d more than the comparable 4-week period in 2009.

The input of crude into US refineries fell by 107,000 b/d to 15.1 million b/d last week, with units operating at 87.8% of capacity, down from 87.9% previously, EIA said. Gasoline production dropped to 9 million b/d. Distillate fuel production decreased to 4.2 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, observed, “The EIA weekly data continued the recent trend of strong distillate demand, which is also supported by recent trucking data points. However, gasoline consumption is only slightly above year-ago levels.”

He reported, “Gasoline inventories are 8% ahead of their 5-year average for this calendar week while distillate stocks are 27% ahead of their 5-year mean.” He estimated the average US refining margin decreased from $14.81/bbl to $11.47/bbl over last week vs. averages of $12/bbl in 2008 and $9/bbl in 2009.

Energy prices
The July contract for benchmark US light, sweet crudes traded as low as $67.15/bbl May 25 before closing at $68.75/bbl, down $1.46 for the day on the New York Mercantile Exchange. The August contract dropped $1.52 to $70.10/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., gained $1.87 to $68.75/bbl as it returned to lock-step with the front-month crude futures contract. Heating oil for June delivery declined 2.76¢ to $1.87/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month fell 4¢ to $1.93/gal.

The June natural gas contract increased 3.4¢ to $4.05/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., inched up 0.5¢ to $4.08/MMbtu.

In London, the July IPE contract for North Sea Brent crude lost $1.62 to $69.55/bbl, maintaining its premium over WTI. The June contract for gas oil dropped $11.75 to $592.50/tonne.

The average price for OPEC’s basket of 12 reference crudes was down $1.75 to $66.84/bbl.

Contact Sam Fletcher at samf@ogjonline.com.