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Commodity monthly Outlook - Crude oil and Natural gas

Since last six months crude oil futures have fluctuated in a stable range of $68-$80 keeping fundamental balance on market driven forces. Crude oil futures ended up by more than 2% settled to closely $77. The recent development in the oil market has kept oil prices under control over huge speculation trading compare to last year.

 

There is a question among most energy analysts and experts that whether crude oil market is in equilibrium or not. The stable oil prices since last few months suggesting a balance in the market which may drive oil prices on any side of breakout. The point that signals the equilibrium is fragile is growing supplies and recent market uncertainties which may drag oil prices lower. However the upward breakout backed by higher demand from emerging markets and rising production cost may drive oil prices to new highs.

 

Rising oil supplies will mostly offset higher demand over the next five years, the International Energy Agency said on Wednesday in a report.  The average daily global oil consumption is expected to grow by 1.2 mb each year between 2009 and 2015. The supply-demand picture would be virtually unchanged next year compared with this year, although spare capacity would begin to shrink by 2015. (IEA: Medium Term Oil & Gas Report).

 

 

In 2010, global consumption is projected to grow by 0.95 mb/d, slightly up from the previous forecast. All the expected growth in oil demand this year is projected to come from the non-OECD region led by Asia. Overall, most growth will come from transport and petrochemical sectors worldwide. The International Energy Agency revised up its global oil demand forecast for the 2010 on stronger-than-expected preliminary OECD data. The global oil demand growth in 2010 is now seen at +1.7 mb/d to 86.4 mb/d.

 

This season’s first hurricane has just showed its sign in the Gulf of Mexico. The first hurricane Alex (Cat 1) is now located about 220 miles southeast of Brownsville Texas moving westward. There is a 70% chance that three to seven major hurricanes will swirl in the Atlantic in the six months following the start of the hurricane season on June 1, according to NOAA's Climate Prediction Center.

 

The recent shift in sentiment, along with the growing imbalance in supply/demand fundamentals, highlights the need for an increasingly cautious approach when evaluating the market developments. This will be particularly important going forward, given the considerable uncertainties facing the market for the remainder of this year. The important resistance for crude oil lies at $80 with support at $69.

Natural gas futures managed to end up in green after grabbing the biggest monthly gain in previous month. Natural gas prices gained more than 4% settled at $4.50 for the month June 2010 on fresh buying on higher residential and industrial demand expectations. The threat from cyclone formations and hurricane Alex in Gulf of Mexico support natural gas prices to trade up despite mild weather forecasts and growing supplies.

 

Working gas in storage was 2,624 Bcf as of Friday, June 18, 2010, according to EIA report. Stocks were 14 Bcf less than last year at this time and 309 Bcf above the 5-year average of 2,315 Bcf. In the East Region, stocks were 87 Bcf above the 5-year average while stocks in the producing region were 130 Bcf above the 5-year average of 805 Bcf after a net injection of 16 Bcf. Stocks in the West Region were 92 Bcf above the 5-year average. At 2,624 Bcf, total working gas is within the 5-year historical range.

 

 

(Source: EIA)

 

 

EIA expects total marketed natural gas production to increase by 2.1% to 61.2 Bcf/d in 2010. Natural gas production grew steadily for the first half of the as the total number of working natural gas rigs increased to 958 from 751 in December 2009. The production forecast was revised upwards by EIA as the number of working rigs continued to increase to almost 970 during mid June 2010.

 

The increased production and supplies may offset for the second half by production disruption in Gulf of Mexico on intense hurricane season. The median outcome for projected total shut-in production due to tropical storms from June through November 2010 is 166 Bcf compared with an estimated 19 Bcf shut-in production last year.

Whole sale natural gas prices at the bench mark Henry Hub delivery point ended more than 8% higher from $4.31 to $4.68 for the month June 2010. The fresh buying in physical market helped spot prices to trade higher than future contract. EIA expects the annual average natural gas Henry Hub spot price for 2010 to be $4.49 per thousand cubic feet (Mcf), followed by rise in 2011, averaging $5.06 per Mcf for the year.

 

We expect natural gas prices to face some correction in the first half of the month backed by some profit booking supported by warmer weather forecasts which may reduce residential demand. The industrial outlook seems positive and demand from industries will grow with gradual economic recovery. The important resistance for natural gas lies at $5.20 with support at $3.90.


Disclosure: Short Crude oil, Long Natural Gas