Energy prices hit new highs May 20 and continued climbing after former oilman T. Boone Pickens predicted crude futures will reach $150/bbl this year because there is not enough supply to meet demand.
Pickens, founder and chairman of BP Capital LLC in Dallas, claimed producers are running out of oil.
The new front-month crude contract for the first time broke through the $130/bbl barrier in after-hours electronic trading. The July contract peaked at an overnight high of $130.47/bbl and remained above the $130 mark in early trading May 21—”up more than a dollar from where the June contract expired,” said analysts at Pritchard Capital Partners LLC, New Orleans.
Analysts in the Houston office of Raymond James & Associates Inc. noted, “Oil is no longer backwardated, as the futures strip is higher than the front month for the first time since mid 2007. This should create an incentive to store oil—look for oil inventories to start increasing. Natural gas continues to follow crude’s lead, now up over $11.50/Mcf. With the natural gas storage deficit likely to remain elevated for the coming weeks, prices could hold at these elevated levels in the short term.”
Predictions of $150-200 oil are “more like bull’s-eyes than forecasts,” giving the “herd” of traders new targets to aim for, said Pritchard Capital analysts on May 21. “Front-month Brent crude has yet to breach the $130/bbl mark, but is on the precipice, reaching as high as $129.92/bbl today. July is the only contract through June 2009 trading below $130/bbl, however, which suggests it’s only a matter of time before it too joins the ranks. Refined products are also trading at fresh-record high levels this morning, breaking the typical pre-inventory lull.”
The strong gains in morning trading May 21despite earlier predictions for across-the-board stock builds “underscores the notion that this rally has little, if anything, to do with the fundamentals,” the analysts said.
Furthermore, they said, “In the sea of records that have been broken this month, one in particular stands out—yesterday’s breach of the historical $4/gal mark for a US refined spot product.” The spot market June contract for jet fuel in Los Angeles traded May 20 at a high of 22.5¢ over July heating oil futures, or $4.02/gal, up 59¢/gal, or 17%, from a month ago and “a staggering 91% increase,” or $1.91/gal, from a year ago. “The gains come in spite of Petroleum Administration for Defense District (PADD) 5 [on the West Coast] jet fuel inventories that have topped year-ago levels for the past 7 weeks. The record-high prices also defy jet-fuel demand figures, which last month were the lowest for any April in the past 5 years,” said Pritchard Capital analysts. “With heating oil futures topping out at $3.8363/gal in overnight trading, it’s just a matter of time before more products join the $4/gal-and-over club.”
The Energy Information Administration reported May 21 that commercial inventories of benchmark US light, sweet crudes fell 5.4 million bbl to 320.4 million bbl in the week ended May 16. The consensus among Wall Street analysts was for a 500,000 bbl increase. Gasoline stocks declined 800,000 bbl to 209.4 million bbl, vs. expectations of a 300,000 bbl build. Distillate fuel inventories gained 700,000 bbl to 107.8 million bbl, half the increase anticipated by analysts. Propane and propylene inventories increased 2.7 million bbl to 34 million bbl.
Imports of crude into the US dropped 696,000 b/d to 9.2 million b/d in that same period. Input of crude into the US refining system inched up by 29,000 b/d to 15.1 million b/d, with refineries operating at 87.9% of capacity. Gasoline production increased to 9 million b/d while distillate fuel production decreased to 4.3 million b/d.
Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, “Although the headline data of falling gasoline inventories may be viewed as positive by some analysts, the underlying supply and demand data trend remains negative, in our opinion. The average refinery utilization rate increased to 87.9%, the highest level since January 4, 2008, and a signal that production should rise in the coming weeks.” He added, “We do not expect improvement given the high retail gasoline, diesel, and jet fuel prices. We expect weak fundamental conditions to continue in the near term.”
Rousseau estimated the average US refining margin increased to $16.41/bbl from $14.36/bbl over the past week and has averaged $12.42/bbl so far this year, vs. $18.19/bbl in 2007 and $15.92/bbl in 2006.
Meanwhile, the US dollar fell 1% to $1.57 against the euro. The value of the dollar has been in decline since September when the US Federal Reserve began cutting interest rates on overnight loans to banks in an effort to avoid recession.
In an apparent play to assure constituents they are taking some action against rising prices, the US House of Representatives passed legislation to stretch US antitrust laws to include members of the Organization of Petroleum Exporting Countries. The Bush administration opposes the bill. Critics claim that targeting OPEC investments in the US as a source of damage awards in such cases would spark retaliations that could result in an embargo of OPEC oil to the US.
The June contract for benchmark US light, sweet crudes hit an intraday record of $129.60/bbl in floor trading before expiring at a record $129.07/bbl, up $2.02 for May 20 on the New York Mercantile Exchange. The July contract gained $2.26 to $128.98/bbl on the floor. On the US spot market, West Texas Intermediate in Cushing, Okla., was up $2.02 to $129.08/bbl. Heating oil for June delivery bumped up 9.99¢ to a record $3.78/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) increased 6.78¢ to $3.30/gal.
The June natural gas contract gained 4.11¢ to $11.37/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 9¢ to $11/MMbtu.
In London, the July IPE contract for North Sea Brent crude rose by $2.78 to $127.84/bbl. The June gas oil contract jumped by $31.75 to $1,230.50/tonne.
The average price for OPEC’s basket of 13 reference crudes gained $1.78 to $121.02/bbl on May 20.
Contact Sam Fletcher at firstname.lastname@example.org Oil & Gas Journal