MARKET WATCH: Equity rally prods crude past $67/bbl
Sam Fletcher
OGJ Senior Writer
HOUSTON, July 24 -- The front-month crude contract shook off its loss from the previous session and climbed above $67/bbl July 23 in the New York market, led by a price increase for reformulated blend stock for oxygenate blending (RBOB) and a strong surge in the equity market.
“After better-than-expected home sales and strong earnings reports from some of the corporate giants, the Dow Jones Industrial Average jumped 188 points to crack 9,000 for the first time since January, and energy stocks took notice. The E&P Index rose 3.4% and the Oil Service Index rose 3.9%. Oil continued its push higher, now up 6% so far this week,” said analysts in the Houston office of Raymond James & Associates Inc.
Crude’s advance also was supported by a report that the Organization of Petroleum Exporting Countries may soon reduce exports to 22.39 million bbl from 22.78 million bbl. Oil Movements consultants said seaborne crude cargoes from OPEC members other than Angola and Ecuador will drop 390,000 b/d in the 4 weeks to Aug. 8.
In New Orleans, however, analysts at Pritchard Capital Partners LLC said, “Compliance by OPEC members with current production is at 72%, so if the crude price remains above $60, it seems unlikely further production cuts will be met.”
Many observers point out the recent rally of oil prices is buoyed by optimistic expectations and not supported by market fundaments. However, Olivier Jakob at Petromatrix, Zug, Switzerland, said, “If the current optimism lifting shares is totally unfounded then the current strength in oil will probably not hold, but if the global destruction of the economy has indeed bottomed (overnight data has South Korea second-quarter GDP showing the strongest quarter-over-quarter growth in 6 years) then so should the oil markets.”
Jakob said, “The current crisis is unprecedented, hence all economists are lacking the tools to fully and properly analyze it; what we can, however, observe is that the green-shoots in macro inputs have not been invalidated by the earning reports and reenforces the views that the lows on equities have indeed been printed. The US equities have now significantly broken through the resistance lines and will move these levels to support lines; the technical picture on the stock market is starting to be much more positive; the volatility index is relatively low (23.43%); and we need to be ready for more short covering on equities as we start to look for positioning for the start of 2010.”
Natural gas was “not so lucky,” said Raymond James analysts. “After the Energy Information Administration reported injection of 66 bcf, relatively in-line with consensus estimates, natural gas prices fell over 6%.”
The EIA reported the injection of 66 bcf of natural gas into US underground storage in the week ended July 17. That increased working gas in storage to 2.95 tcf, up 568 bcf from last year at this time and 458 bcf above the 5-year average.
Pritchard Capital Partners said, “Since weather remains mild and industrial demand nonexistent, the fact that the storage injection is below the same period in 2008 indicates the natural gas supply is beginning to fall, partly as a result of shut-ins and market share gains in the power sector over the past month. The market chose to focus on storage. With storage at 2.95 tcf and 3.9 tcf of total storage capacity and 14 more weeks of storage injections, at the current rate of injections it is possible the US could fill storage in September.”
Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, “Front month gas prices continue to trade near $3.50/MMbtu on the back of weak demand and ample supply. Industrial demand is being hurt by the recession and electric demand is off on cooler temperatures. Storage now seems set to reach an uncomfortable 3.9 tcf.”
Sieminski also reported, “We believe refining margins are being impacted by excess capacity. We estimate that there was approximately 3-4 million b/d of net spare capacity in 2008 that could double into 2009-10. We calculate in a rational market, the incremental 4 million b/d of excess capacity would force a $1.30/bbl reduction in margins. However, we estimate that due to government distortions, the actual reduction will be closer to $2/bbl.”
Energy prices
The September contract for benchmark US light, sweet crudes gained $1.76 to $67.16/bbl July 23 on the New York Mercantile Exchange. The October contract escalated by $1.83 to $68.87/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., jumped $2.54 to $66.11/bbl as it attempted to get back in synchronization with the front-month futures price. Heating oil for August delivery climbed 5.32¢ to $1.76/gal on NYMEX. RBOB for the same month jumped 7.49¢ to $1.91/gal.
The August natural gas contract fell 24.3¢ to $3.55/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., climbed 10.5¢ to $3.62/MMbtu.
In London, the September IPE contract for North Sea Brent crude gained $2.04 to $69.25/bbl. August gas oil was up $16.25 to $562.75/tonne.
The average price for OPEC’s basket of 12 reference crudes escalated by $1.78 to $66.46/bbl on July 23.
Contact Sam Fletcher at [email protected].
