MARKET WATCH
Energy prices plummet as demand falls

Sam Fletcher
Senior Writer

HOUSTON, Aug. -- Energy prices plummeted Aug. 18, but not to any bargain levels, as the American Petroleum Institute reported a big drop in US demand during July because of high fuel prices.

Energy futures markets also were impacted by a US Labor Department report of a larger-than-expected increase in wholesale prices in the same month, signaling that high energy costs also are affecting other segments of the economy.

Deliveries decline
Total domestic petroleum deliveries, a key measure of US demand, fell by 3% in July, marking the largest year-to-year drop in 3½ years, API reported Aug. 17. Higher retail prices caused a drop of 0.8% in gasoline deliveries, said API in its monthly statistical report. It said gasoline deliveries so far this year have been nearly flat, compared with a 2% increase in 2004.

Residual fuel deliveries fell 27% in July as electric utilities and industrial users switched to cheaper alternative fuels. Deliveries of distillate fuel oil and jet fuel both increased, however. Although crude input into US refineries was down by 2.2%, distillate production increased more than 7% in July over the same period in 2004. Production of low-sulfur diesel rose 2.8% to a July record of 3.08 million b/d. Heating oil output jumped more than 20% to 1.1 million b/d, API said.

API reported gasoline production fell 2.7% to 8.62 million b/d in July, reflecting weaker demand and the availability of imports. Refinery utilization rates were still strong at nearly 94% of capacity, down from an even higher 96.8% in July 2004. Gasoline inventories fell below 210 million bbl for the first time since October, ending July at 208.5 million bbl, slightly below the 2004 average for the first time this year. But distillate inventories rose by a strong 11 million bbl in July over June to 126 million bbl, up 4 million bbl from July 2004. Crude inventories slipped by 4 million bbl from June to July to 319 million bbl, some 23 million bbl above the 5-year average.

US crude production in July fell by 4.2% from June's level, the fifth month-to-month decline this year, marking the steepest percentage decline since September 2004 and the fifth largest in at least 35 years, API said. Precautionary shut-ins because of tropical storms in the Gulf of Mexico, combined with down time in Alaska, contributed to that decline. At 5.18 million b/d, crude production in July was down 5.1% from year-ago levels.

Meanwhile, a fire forced the partial shutdown of the Amuay oil refinery in Venezuela, reducing its production capacity to 150,000 b/d from 410,000 b/d, said Petroleos de Venezuela, the state-owned oil company. The massive Paraguana complex where Amuay is located is one of the world's largest refining installations, with a stated capacity of 940,000 b/d, PDVSA reported Aug. 17.

Energy prices
Although it hit a high of $66.60/bbl in early trading Aug. 17, the September contract for benchmark US sweet, light crudes closed at $63.25/bbl, down by $2.83 for the day on the New York Mercantile Exchange. The October crude contract plunged by $2.85 to $63.85/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by $2.83 to $63.26/bbl. Gasoline for September delivery fell by 9.26¢ to $1.80/gal on NYMEX. Heating oil for the same month lost 8.01¢ to $1.78/gal.

The September natural gas contract plummeted by 36.1¢ to $9.39/MMbtu on NYMEX, "undermined by a steep drop in crude oil prices and milder weather this week that has slowed demand despite a still firm physical market," said analysts at Enerfax Daily.

The Energy Information Administration reported on Aug. 18 the injection of 52 bcf of natural gas into US underground natural gas storage in the week ended Aug. 12. That was up from 43 bcf the previous week but down from 78 bcf a year ago. Gas storage now stands at 2.5 tcf, down by 4 bcf from year-ago levels but up by 140 bcf from the 5-year average.

In London, the October contract for North Sea Brent crude lost $2.52 to $62.56/bbl on the International Petroleum Exchange. Gas oil for September declined by $12.50 to $575.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes fell by $1.18 to $57.71/bbl.

Contact Sam Fletcher at samf@ogjonline.com

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