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A week of falling prices

Sam Fletcher
Senior Writer

The biggest ever work-week fall of crude prices dropped a total $16.20 July 14-18 to $128.88/bbl, "below key price points that bulls may have needed to hold onto to continue their rally," said analysts at Pritchard Capital Partners LLC, New Orleans.

"Some think enough damage was done to the complex to usher in $120/bbl crude oil as the next technical 'must hold,'" the analysts said at the time. Prices continued falling the following week, with the August contract for benchmark US light, sweet crudes expiring July 22 at $127.95/bbl. As the Energy Information Administration reported a bigger than expected drop in US oil inventories and an unexpected jump in gasoline stocks, The new front-month September contract dropped $3.98 to $124.12/bbl July 23 before rebounding to $125.49/bbl July 24 on the New York Mercantile Exchange.

Prices for crude and petroleum products made moderate gains in early trading July 25. Pritchard Capital analysts said, "Product inventories continue to build amid soft demand, but in order for reformulated blend stock for oxygenate blending (RBOB) and heating oil to test some of the critical support levels, it will need some cooperation from crude oil, particularly in the case of RBOB where crack spreads are miserable."

Dolly, a category 2 hurricane, came ashore at South Padre Island, Tex., July 23, and then subsided to a tropical storm as it drenched South Texas. Although the storm inflicted no damage on most oil and gas operations in the Gulf of Mexico, the US Minerals Management Service reported workers were evacuated from 62 of the 717 manned production platforms in the gulf and from 8 rigs of the 123 offshore rigs by the time the hurricane made landfall. MMS estimated 4.47% of oil production and 7.87% of gas production in the gulf was shut in due to the storm. Total production from US leases in the gulf was estimated at 1.3 million b/d of oil and 7.7 bcfd of gas as of January. Workers quickly returned offshore after the hurricane passed.

Inventory surprises
EIA reported commercial US crude inventories fell 1.6 million bbl to 295.3 million bbl during the week ended July 18, exceeding a Wall Street consensus of a 700,000 bbl draw. Gasoline stocks jumped by 2.9 million bbl to 217.1 million bbl in the same period, vs. Wall Street's expectations of a 100,000 bbl decline. Only the distillate fuel consensus was on target, with inventories up 2.4 million bbl to 128.1 million bbl. Propane and propylene inventories were up 300,000 bbl to 45.3 million bbl.

Imports of crude into the US fell 985,000 b/d to 9.8 million b/d in that same week. Input of crude into US refineries was down 355,000 b/d to 15.1 million b/d with refineries operating at 87.1% of capacity. Gasoline production rose to 9.2 million b/d during that period, while distillate fuel production decreased to 4.6 million b/d.

"The larger-than-expected draw was primarily due to a drop in imports to 9.81 million b/d from 10.79 million," said Michael C. Schmitz, Banc of America Securities LLC, New York. "Imports have averaged 9.88 million b/d year-to-date, 2.3% lower year over year. Otherwise, refinery utilization dropped 2.4% to 87.1% vs. consensus for no change as refining margins remain weak due to deteriorating product demand."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, reported, "Weak demand led to a 6.3 million bbl (1.7%) build to refined product inventories (gasoline plus distillate plus jet fuel), the largest increase since Jan. 4." As a result of the rising inventories and falling margins, refiners reduced their utilization rate to 87.1%, well below year-ago levels of 91.7%. Refinery runs were at the lowest levels since 1997.

Soleil-Back Bay Research lowered its estimates of refiners' earnings in the last half of 2008 through 2009 primarily on expectations that weak demand for refined products will continue over the next 12-18 months.

Based on US data, July has been a weak month for gasoline demand while the overall level of US oil demand remained relatively robust. Compared with an all-time record high demand in July 2007, Paul Horsnell, Barclays Capital Inc., London, said, "Gasoline demand is noticeably weaker in year-over-year terms than it has been in any month this year." Despite talk of demand destruction, he said, "When the fall already released in wholesale prices is passed through to retail prices, and with the rate of increase tailing off, we would expect US gasoline demand to recover somewhat from the relatively gentle 1.4% decline seen for 2008 to date."

(Online July 28, 2008; author's e-mail: samf@ogjonline.com)


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