MARKET WATCH
Crude futures prices continue to fall

Sam Fletcher
Senior Writer

HOUSTON, Sept. 6 -- Crude prices continued dropping toward a 3-month low Sept. 5 on the New York market, but the October natural gas contract increased, after falling in the previous three sessions, as Tropical Storm Florence formed in the Atlantic.

Florence is expected to strengthen into a hurricane, but forecasters said it is too soon to tell whether the sixth-named storm of the 2006 season would reach the US. "A hurricane making landfall would have a pronounced effect on natural gas prices; however, Tropical Storm Florence is expected to miss the Gulf of Mexico, which is a source of one fourth of US oil output, according to a government forecast," said J. Marshall Adkins in the Houston office of Raymond James & Associates Inc.

September marks the usual peak of the US hurricane season when historically 40% of Atlantic basin storms have formed.

Oil market factors
"Oil prices are dropping to a 3-month low around $68/bbl, as prospective [United Nations] sanctions are expected to have little impact on Iran's oil shipments," Adkins said. "Militaristic efforts to curb Iran's uranium enrichment are not seen as a viable option for the adverse impact they might have on the oil production from the world's fourth-largest oil producer. Sanctions may be imposed instead, as Iran failed to meet an Aug. 31 deadline to halt the enrichment."

In a separate report, Robert S. Morris, Banc of America Securities LLC, New York, said: "The two critical factors underpinning the ultimate path for oil prices should be the strength of the US and global economies, and the extent of global geopolitical tensions, most notably the nuclear stand-off with Iran. Perhaps most surprising has been the resiliency of US gasoline demand with prices remaining above 3% of per capita disposable income since late-March. Importantly, although the US economy does appear to be decelerating, it is not an abrupt slowdown and continues to expand."

Energy prices
The October contract for benchmark US light, sweet crudes lost 59¢ to $68.60/bbl Sept. 5 on the New York Mercantile Exchange. The November contract dropped 60¢ to $69.77/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down by 59¢ to $68.61/bbl. Heating oil for October deliver declined by 3.11¢ to $1.94/gal on NYMEX. Unleaded gasoline for the same month fell by 8.79¢ to $1.65/gal.

"Emphasis is shifting away from gasoline as the nation looks forward to winter and the need for heating oils," said Adkins.

The October natural gas contract recovered 16.2¢ to $6.04/MMbtu Sept. 5 on NYMEX after dropping a total 99.9¢ in the previous 3 sessions. "Whereas we were forecasting just a few months ago that domestic storage levels would exceed 3.6 tcf at the start of the upcoming winter, after a nearly 15% hotter-than-normal summer, our models now project that storage at the start of November will be around 3.45 tcf, which is still near the highest mark ever at the start of the traditional withdrawal season," said Morris. "With normal weather, we expect natural gas prices will remain below residual fuel oil prices through the winter but, importantly, project that they will shift back to be between residual and distillate fuel oil prices at some point next summer."

In London, the October IPE contract for North Sea Brent crude gained 38¢ to $68.09/bbl. The September gas oil contract increased $3.50 to $621.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 benchmark crudes lost 59¢ to $63.54/bbl on Sept. 5.

Contact Sam Fletcher at samf@ogjonline.com.

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