Market watch: Crude futures prices decline as war premium wanes

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 9 -- Crude futures prices declined Tuesday in New York and London as traders continued whittling away the perceived "war premium" on oil, despite a sharp drop in US inventories to an 18-month low after two storms recently disrupted production in the Gulf of Mexico.

The US Minerals Management Service reported gulf production totaling 237,275 b/d of oil and 1.7 bcfd of natural gas was still shut in Tuesday, although no major damage to offshore production facilities was reported in the wake of Tropical Storm Isidore or Hurricane Lili.

Following the close of trade Tuesday, the American Petroleum Institute reported US oil stocks fell by 2.6 million bbl to 273.3 million bbl last week, when Lili forced the evacuation of offshore crews from the central gulf off Louisiana.

With the Louisiana Offshore Oil Port also shut down most of last week by the storm, US oil imports dropped more than 1 million b/d to 7.7million b/d. US refineries were operating at 84.7% utilization during the week as a result of the fall off of imports and disruption of some Gulf Coast units. That was down from 91.5% utilization the previous week and 92.8% during the same period last year.

As a result, US gasoline production dropped by 399,000 b/d to 8.3 million b/d last week, while total distillate production fell 293,000 b/d to 3.3 million b/d. US gasoline inventories fell by 3.6 million bbl to 206 million bbl last week, and total distillate stocks dropped 2.4 million bbl to 127.6 million bbl.

That put total US crude and petroleum product inventories at an 18-month low, "in part reflecting the tightening of stocks globally," Matthew Warburton at UBS Warburg LLC, New York, reported Wednesday.

Even a 1.1 million bbl drop in US demand for crude last week "only partially offset curtailment of (gulf) crude production (estimated at 1.5 million b/d at its peak) and suspended tanker unloading at LOOP," he said. US crude inventories now are at their lowest level in 20 years, while US refinery utilization is at its lowest point since February 2000, said Warburton.

"We expect refining utilization to recover once the effects of the recent weather disruptions have passed," he said. "However, this is also likely to limit any reversal of crude inventories. The recent widening of light (vs.) heavy crude spreads with rising OPEC-10 production should also provide incentive for incremental crude demand from US-based complex coking refineries."

Although a large drop in US inventories was expected, the November contract for benchmark US light, sweet crudes retreated 16¢ to $29.48/bbl Tuesday on the New York Mercantile Exchange, while the US Congress debated President George W. Bush's request for authority to take military action against Iraq. The December contract was down 13¢ to $29.51/bbl.

Home heating oil for November delivery lost 0.11¢ to 79.05¢/gal. However, unleaded gasoline for the same month gained 1.88¢ to 82.35¢/gal.

The November natural gas contract rose 12.2¢ to $3.86/Mcf Tuesday on NYMEX, in the process "crossing major technical trend-lines as locals and non-commercial speculators rushed in to buy," analysts at Enerfax Daily reported Wednesday. "The market opened up and continued higher for most of the morning, but lost momentum just before noon and slipped lower for most of the afternoon, before rallying again just before close. Concerns about production outages from Hurricane Lili pushed up spot prices, helping boost the NYMEX early."

In London, profit taking caused futures prices for North Sea Brent to slip temporarily below $28/bbl, briefly touching a 3-week low in Tuesday afternoon trading on the International Petroleum Exchange. However, the November Brent contract recovered to $28.09/bbl, down 14¢ for the day in relatively quite, range-bound trading. The November natural gas contract lost 4¢ to the equivalent of $3.10/Mcf on the IPE.

The average price for the Organization of Petroleum Exporting Countries' basket of seven benchmark crudes dropped 25¢ to $27.98/bbl Tuesday.

Contact Sam Fletcher at samf@ogjonline.com


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