MARKET WATCH: Stock market plunge chills energy prices

Sam Fletcher
Senior Writer

HOUSTON, July 27 --Energy prices fell July 26, pulled down by a stock market plunge that brought the Dow Jones Industrial Average down 311.5 points for its second worst day of the year, as fears of shaky credit markets and the troubled housing sector swept Wall Street.

The September contract for the best US crude topped $77/bbl in intraday trade, however, before closing below $75/bbl. It "reluctantly gave up the early session gains when it was apparent that the stock market slide would be too large to ignore," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, in a July 27 report.

"The movements on equities will obviously be a key driver today, but the 'buying on the dips' pattern has not disappeared yet," Jakob said. He also noted, "The dollar index is maintaining its recent rebound and is a key indicator to follow for oil as long as we stay near record highs."

Analysts in the Houston office of Raymond James & Associates Inc. reported crude prices rose during premarket trading July 27 on a forecast for a growing US economy. They cited a Bloomberg News survey of 85 economists that indicated the US gross domestic product increased at an annual rate of 3.2% during the second quarter of 2007. "This would represent the fastest pace of growth in over a year," they said.

"Helping keep oil prices in check is the news that US gasoline stockpiles are capable of meeting demand in the home stretch of driving season," said Raymond James analysts. They also noted that the price premium for North Sea Brent crude vs. West Texas Intermediate has virtually disappeared, with the two crudes now trading within a few cents of each other "for the first time since February."

Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., said, "With summer (peak demand) now more than half done, there is a growing sense that supplies are adequate, and wholesale gasoline prices, refining margins, and refiner stocks have sharply pulled back."

Bernstein said, "US total gasoline inventories are currently 6.9 million bbl (3%) below comparable year-ago levels. However, moving from summer to fall, gasoline demand typically declines, and supply concerns abate. Last year, this seasonal softening resulted in US average refining margins falling from $22/bbl to $7/bbl from late July through September and in a 30% average decline in refiner stocks. Despite the relatively tighter supply-demand situation, this year's seasonal sell-off has arrived about 2 weeks earlier."

Energy prices
The September contract for benchmark US light, sweet crudes traded as high as $77.24/bbl July 26 before closing at $74.95/bbl, down 93¢ for the day on the New York Mercantile Exchange. The October contract dropped 99¢ to $74.47/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.03 to $74.96/bbl. Heating oil for August delivery fell 3.31¢ to $2.03/gal on NYMEX. The August contract for reformulated blendstock for oxygenate blending (RBOB) declined by 1.2¢ to $2.08/gal.

The August natural gas contract gained 1.8¢ to $5.94/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 23.5¢ to $5.83/MMbtu. The natural gas commodity price advanced as traders ignored huge US storage inventories reported July 26 by the Energy Information Administration and focused instead on the approach of the most intense 2 months of the hurricane season, said analysts at Enerfax Daily. The National Hurricane Center in Miami says August and September typically produce the largest number of tropical storms in the Atlantic. Hurricane Katrina formed in late August 2005, followed by Hurricane Rita in mid-September. The 2007 storm season that began in June is expected to produce 13-17 named storms, including as many as 5 major hurricanes in Categories 3-5.

In London, the September IPE contract for North Sea Brent crude fell by $1.14 to $75.18/bbl. Gas oil for August jumped by $19.25 to $656.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 reference crudes increased by $1.31 to $72.88/bbl on July 26.

Contact Sam Fletcher at samf@ogjonline.com.

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