MARKET WATCH: Crude falls sharply in profit taking

Sam Fletcher
Senior Writer

HOUSTON, May 28 -- After gaining nearly 5% in a 4-session run up the previous week, crude prices dropped below $129/bbl in profit taking May 27 in the New York market.

Prices started the post-Memorial Day session by climbing higher but then begin to fall, with the decline continuing through the overnight session. "It looks like another volatile day in the oil trading pits, and if the overnight market is any indication prices are headed lower. Oil prices are tumbling [in early trading] in overseas and in US markets," said analysts May 28 at Pritchard Capital Partners LLC, New Orleans.

Olivier Jakob at Petromatrix, Zug, Switzerland, reported, "The price pattern in the open session [May 27] was actually very similar to the one seen on [May 22] and [May 23] and suggests preset profit-taking decisions rather than reacting to any immediate market inputs." The strengthening US dollar may have helped limit the fall in energy prices, however. The dollar got a boost against the euro with indications of a decline in German consumer confidence.

Meanwhile, Pritchard Capital analysts said, "More than a dozen US states now have retail [gasoline] prices that average more than $4/gal, and the US average sits within just a few cents of the same mark. Prices have never been this high. California has become the first state where diesel fuel prices average $5/gal." Moreover, data indicate Connecticut diesel prices will likely top the $5/gal mark May 28.

In other news, the Federal Highway Commission reported the lowest miles driven by US motorists during the month of March in the 66 years it has been doing that survey. March's driving figures also showed the steepest decrease ever recorded, or down 4.3% from the same month last year.

Political issue
Because of public outcry against high energy costs, Jakob said, "The price of oil has now become the No. 1 issue for politicians. On oil futures it is bringing a 'system risk' that did not exist a year or 2 months ago. US lawmakers are starting to pay greater scrutiny to commodity positions held by pension funds and investment banks, and pressure is increasing on the Commodity Futures Trading Commission for either changing the limit rule or at least bringing more transparency on these positions. Heads of pension funds are expected to be called soon to the Senate 'grill' like heads of oil majors were."

After hundreds of British truck drivers tied up traffic in London on May 27 in protest against rising fuel prices, UK Prime Minister Gordon Brown said only an international strategy would work in bringing oil prices down. In France fishermen blockaded ports in a similar protest, prompting French President Nicolas Sarkozy to propose a European Union cap on fuel sales tax.

As a result, there are now indications that the UK government may back away from earlier plans to increase road tax on higher-polluting cars and to increase the fuel tax. The UK now has the highest fuel duty in the European Union, with tax accounting for 65% of the pump price of petrol.

Two years ago Brown joined other European leaders in increasing taxes on large vehicles, fuel, plastic bags, and air travel in an effort to reduce carbon emissions 60% by 2050. Now Brown pledges global action on high oil prices will be the top topic at the Group of Eight (G8) July summit in Japan. Meanwhile, he is to meet senior oil industry executives in Scotland to discuss how to maximize production from the UK's depleting North Sea fields. Taxes should be a main point on that agenda. Brown increased taxes on North Sea production when he was chancellor.

With the current protests to reduce fuel prices, some observers are saying—perhaps prematurely—that the political power of the Green Party may be broken. Meanwhile, in a recent poll sponsored by the National Center for Public Policy Research, a conservative think tank and policy institute, found 65% of US residents don't want to spend even a penny more for gasoline in order to reduce greenhouse gas emissions. "The number rejecting raising gas prices in an effort to combat global warming has increased by 17 percentage points—or 35%—in just over 2 months," the center reported. Another 13% of those polled opposed more than a 5% increase in gasoline prices to reduce emissions. The survey also indicated 71% of US residents reject spending more for electricity, with 16% opposing spending any more than 12% extra for electricity for the same purpose.

Jakob said, "On the demand side, Taiwan is added to the list of countries going through the process of price revisions with an increase of 16% on diesel and 13% on gasoline. India should be the next country in line to lower internal subsidies. The problem is that these budgetary imbalances have not been created by $130/bbl but by $100/bbl oil and will likely be followed by more revisions."

Supply declines
Meanwhile, Indonesia said it will quit the Organization of Petroleum Exporting Countries by yearend because of its declining production, lack of investment, and the absence of major new discoveries. The country's production has dropped to 927,000 b/d this year from 1.7 million b/d in the early 1990s. Indonesia is the only Southeast Asia member of OPEC.

Iran's crude exports were down 200,000 b/d in a period through May 20. However, officials of the national oil company said the decline was seasonal and will be made up later.

Jakob reported, "The weekend attack on Nigeria is reported to have shut-in some 130,000 b/d of production" (OGJ Online, May 27, 2008).

Energy prices
The July contract for benchmark US light, sweet crudes dropped $3.34 to $128.85/bbl May 27 on the New York Mercantile Exchange. The August contract fell $3.30 to $128.94/bbl. On the US spot market, West Texas Intermediate was down $2.75 to $128.85/bbl. Heating oil for June delivery lost 6.64¢ to $3.80/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) dipped by 1.3¢ to $3.38/gal.

The June natural gas contract lost 5.6¢ to $11.80/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 25.5¢ to $11.85/MMbtu. Natural gas futures prices climbed during much of the May 27 session, peaking at $12.03/MMbtu just after midday. That triggered a round of selling that then brought the price down in the New York market. Pritchard Capital analysts said, "The last time prompt-month natural gas traded at $12 was in the wake of Hurricane Katrina 29 months ago on Dec. 23, 2005. That date is also significant because just 10 days earlier natural gas futures recorded their all-time high of $15.78/MMbtu." Meanwhile, it is less than a week away from the official start of the 2008 Atlantic hurricane season.

In London, the July IPE contract for North Sea Brent crude fell $4.06 to $128.31/bbl. The June gas oil contract dropped $20.75 to $1,258.75/tonne.

The average price for OPEC's basket of 13 reference crudes declined 66¢ to $125.91/bbl on May 27.

Due to the Memorial Day holiday this week, the Energy Information Administration will not present its weekly inventory data until May 29.

Contact Sam Fletcher at samf@ogjonline.com.

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