Crude oil - Natural Gas Monthly Outlook

Crude oil futures continued to fluctuate in its last six month range of $70 - $80 for August 2010 trading almost 9% down keeping fundamental balance on market driven forces settled at $71.92.  The record inventory storage and higher imports are the major worries for crude oil prices. Crude oil prices kept momentum in the first week of the month traded above $80 on global economic recovery expectations as strong manufacturing data flashed by China and EU countries. The downside came as slowdown signals from US Federal Reserve and EU authorities affect investment sentiments while oil demand forecasts form leading agencies set bearish sentiment for crude oil futures drifting down to $71 levels.

In 2010, global consumption is projected to grow by 1.05 mb/d, up by 0.1 mb\d 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 and OPEC sees the global oil demand for 2010 at 86.6 mb/d while demand for 2011 is expected to rise by 1.5% to 87.9 mb/d.

The US driving season encouraged refiners to boost refinery runs, mainly in the US. However, combination of a well-supplied market across the globe, higher gasoline and middle distillate stocks and uncertainties about the pace of economic growth created a bearish sentiment in the oil product markets. Petroleum supplies are at the highest level in records since 20 years. Overall petroleum stockpiles including Crude oil and its climbed 8.92 mb to 1.14 billion, the highest level since at least 1990. The OECD industry stocks are at 61 days of forward cover levels above the 60 days of forward cover which signals very bearish picture for crude oil market. However, the overhang in stocks, the high level of spare refining capacity and the floating storage is expected to remain unchanged for short term.

Rising oil supplies will mostly offset higher demand over the next five years.  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).

The ongoing hurricane season has generated 3 hurricanes out of 5 storms recorded till date in Gulf of Mexico leaving oil and natural gas producing regions unaffected. The August –September season is expected highly intensive in GoM and 8 to 9 cyclone formations are most likely which may give a push to crude oil and natural gas prices to trade up. However crude oil futures are still under pressure of deteriorated economic outlook and lower demand and we expect oil prices to trade down in first half of September 2010 and later will continue to trade in well known average range of $70 -$80 with important resistance at $84 and with crucial support at $65.

Natural gas futures fell more than 22% in August 2010 most since March 2010 traded below $3.800 on ample supplies and reduced demand due to normal weather across Atlantic Basin. The increased drilling activities on shale gas discoveries have put huge pressure on spot prices resulting in higher storage levels. Natural gas stockpiles are currently at 3.052 Tcf, 6.20% higher to the five year average levels of 2.875 Tcf.

Total Working gas in storage was 3052 Bcf as of Friday, Aug 20, 2010, according to EIA report. Stocks were 198 Bcf less than last year at this time and 177 Bcf above the 5-year average of 2,875 Bcf. In the East Region, stocks were 15 Bcf above the 5-year average while stocks in the producing region were 84 Bcf above the 5-year average of 865 Bcf after a net withdrawal of 5 Bcf. Stocks in the West Region were 78 Bcf above the 5-year average. At 3052 Bcf, total working gas is within the 5-year historical range.

EIA expects total marketed natural gas production to increase by 1.1% to 61.1 Bcf/d in 2010. Natural gas production grew steadily for the first half of the year as the total number of working natural gas rigs increased to 973 from 751 in December 2009 due to higher prices. The production forecast is revised downwards by EIA as the number of working rigs will reduce as lower natural gas prices will cap profits for drillers.

Natural gas spot prices at most markets elsewhere in the lower 48 States reported decline. Natural gas prices fell at the majority of market locations as moderating temperatures eased cooling demand for natural gas. Whole sale natural gas prices at the bench mark Henry Hub delivery point ended almost 27% down from $4.81 to $3.79 for the month August 2010. EIA expects the annual average natural gas Henry Hub spot price for 2011 to be $4.98 per Mcf on slightly decline in production compare to increased consumption.

We expect natural gas prices to trade higher after correction in the first half of the month supported by increased cooling demand. The industrial outlook seems positive and demand from industries will grow with gradual economic recovery. The offshore drilling moratorium is projected to reduce Gulf of Mexico production by 10 Bcf over the last 6 months of 2010 and that may add pressure to natural gas prices to trade up. The important resistance for natural gas lies at $5.20 with support at $3.10.