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MARKET WATCH: Crude prices inch up slightly

Sam Fletcher
Senior Writer

HOUSTON, Aug. 26 -- After the biggest single-day drop in 4 years during the previous trading session, crude prices inched up Aug. 25 in the New York market as the dollar weakened and tankers began loading oil from the Baku-Tbilisi-Ceyhan pipeline for the first time since an Aug. 5 explosion and fire at a pumping station in Turkey.

However, there were also reports a train carrying oil from Azerbaijan to European markets exploded after it apparently hit a landmine on Georgia's main east-west rail line. The extent of damage was not immediately known.

Oil prices dipped in early trading Aug. 26 as the euro dropped to a 6-month low below $1.46, and the US dollar strengthened vs. Japanese currency, nearing 110 yen. But there were later reports of a large jump in crude prices as the National Hurricane Center predicted Hurricane Gustav would gather strength and possibly threaten offshore operations in the Gulf of Mexico later this week.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Short term trading on oil should be dominated this week by tracking Gustav." He said, "This hurricane is not one to ignore, and as we move forward in the week we would expect to see more headlines of personnel being flown out of production platforms. However, on any production disruption, stocks from the Strategic Petroleum Reserve will be very rapidly released, and any impact on refinery assets should be less structural than in previous years given that the US refining industry is running at record low capacity utilization due to the lack of internal demand."

Meanwhile, a report released Aug. 26 by the Department of Energy's Energy Information Administration again revised downward total US oil demand, dropping June demand figures by 800,000 b/d, "which is 1.2 million b/d lower than in June 2007, or 1.5 million b/d [less] than in June 2006," Jakob said. "Gasoline sales in June were 4.4% lower than a year ago, and sales of middle distillates were down an impressive 9.4%," he said.

Jakob said, "Looking at the demand of main products (excluding LPG), not only is demand continuously lower than previous years but has been dropping from April to June while it usually seasonally does the opposite. The US might be dependent on foreign crude oil to run its refineries, but the same refineries have now turned fully dependent on exports to maintain their operating margins.

"The drop in internal demand has been offset by a massive pull from the export markets, and middle distillates exports in June were printing a massive record at 745,000 b/d, which is 500,000 b/d higher than a year ago (or three times as big). This also makes the US refining margin (and US demand for crude oil) more dependent on the state of the economy in the rest of the world and will make the gyration of the dollar a greater input to the profitability of US refineries." Jakob said.

Energy prices
The October contract for benchmark US sweet, light crudes gained 52¢ to $115.11/bbl Aug. 25 on the New York Mercantile Exchange. The November contract advanced 57¢ to $115.71/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 57¢ to $115.27/bbl. Heating oil for September deliver increased 2.03¢ to $3.15/gal on NYMEX. The September contract for reformulated blend stock for oxygenate blending (RBOB) rose 1.37¢ to $2.88/gal.

The September natural gas contract slipped by 1.8¢ to $7.83/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 31.5¢ to $7.61/MMbtu. "September natural gas futures blasted below the old low for the move downward on Monday before rebounding in afternoon trade on a round of short-covering sparked by the development of Gustav," said analysts at Pritchard Capital Partners LLC, New Orleans.

In London, the October IPE contract for North Sea Brent crude advanced 11¢ to $114.03/bbl. Gas oil for September continued to fall, down $9.75 to $1,020.75/tonne

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes dropped $4.02 to $110.61/bbl on Aug. 25.

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