Market watch: Stock market fall pulls down energy futures prices

By OGJ editors

HOUSTON, July 24 -- Energy futures prices continued to fall Tuesday as the financial turmoil in the securities markets triggered fears of an economic recession that could reduce world demand for petroleum.

Spillover pessimism from the stock market smothered a brief recovery of energy futures prices during early trading on the New York Mercantile Exchange. As a result, the new near-month September contract for benchmark US light, sweet crudes lost 39¢ to $26.31/bbl, while the October position fell 41¢ to $25.98/bbl.

Unleaded gasoline for August delivery plunged 1.62¢ to 79.52¢/gal on NYMEX, and heating oil for the same month dropped 1.26¢ to 65.85¢/gal. The August natural gas contract was down 5.8¢ to $2.89/Mcf, wiping out Monday's small gain.

Following the close of NYMEX trading Tuesday, the American Petroleum Institute reported declines in US inventories of oil, gasoline, and distillate fuel during the previous week. US crude stocks dropped more than 6 million bbl to 307.3 million bbl. Distillate stocks lost 2.4 million bbl to 131.9 million bbl. And gasoline inventories were down 1.3 million bbl to 214 million bbl.

"With total crude and product inventories falling 9.8 million bbl, this week's API data appears bullish on first examination," said Matthew Warburton, a New York-based analyst with UBS Warburg LLC. "However, as witnessed in recent weeks, the substantial crude draw once again appears inconsistent with the other inventory and operational data."

The latest US crude inventory figures included an upward revision for the week ended July 12 of 1.3 million bbl in Petroleum Administration for Defense District (PADD) 5, which encompasses the US West Coast, Alaska, and Hawaii, Warburton noted.

With most of the latest draw down—5.4 million bbl—concentrated in PADD 3 along the Gulf Coast, he said, "lower imports or incremental refinery runs could be expected to be contributing to the draw. However, PADD 3 refinery runs fell by 120,000 b/d and overall US imports (of both crude oil and refined products) increased by 300,000 b/d.

"Unless there has been a material erosion in domestic crude production, essentially stable imports and refinery runs would not result in the 14.9 million bbl draw reported by the API over the last weeks," he said.

API reported US refineries operating at 94.4% capacity last week, compared with 95% the previous week and 94.3% during the same period a year ago. It said US oil imports increased by 244,000 b/d to 9.3 million b/d last week, while US gasoline production decreased by 246,000 b/d to 8.4 million b/d.

The falloff in US gasoline inventories indicated a continued recovery of implied demand, up 420,000 b/d, said Warburton, who also noted that gasoline imports "reached 10-year highs" at 750,000 b/d last week, "as well as continued growth in blend stock imports."

"Lower production and higher imports into PADD 1 (covering all of the US East Coast) appear to confirm industry comments about operational problems at the [fluid catalytic cracker] unit at Phillips [Petroleum Co.]'s Bayway, NJ, refinery," he said. Gasoline inventories in PADD 2, which encompasses upper Midwest states, remain at "comfortable" levels, with "limited potential for material price spikes," short of some major disruption.

In London, futures prices for North Sea Brent oil remained "fairly stable" through morning trading on the International Petroleum Exchange before declining Tuesday. Brokers there reported the market's mood turned bearish with several factors pointing to a potential oversupply of oil later this year.

The September Brent contract lost 38¢ to $25.04/bbl Tuesday. Some brokers said prices could recover to just below $26/bbl on a bullish API report of US inventories, but predictions were varied.

The August natural gas contract inched up 0.3¢ to the equivalent of $1.96/Mcf on the IPE.

The average price of the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes lost 40¢ to $24.83/bbl Tuesday.


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