MARKET WATCH: Crude trades below $120/bbl as inflation rises

Sam Fletcher
Senior Writer

HOUSTON, Aug. 5 -- Energy commodity prices fell Aug. 4, with crude closing at its lowest level since May 5 after briefly trading below $120/bbl on the New York Mercantile Exchange, signaling what some say may be the end to the run up in fuel costs this year.

Natural gas dropped below $9/MMbtu during that same session—its lowest level since March—as a report from the US Department of Commerce (DOC) detailing rising inflation in the US economy overpowered market worries about the potential threat of tropical storm Edouard to oil and gas production in the Gulf of Mexico.

Analysts in the Houston office of Raymond James & Associates Inc. said, "The sky was falling [Aug. 4] as the energy sector continued its nosedive," despite "growing nuclear tensions in Iran and the imminent threat of a Gulf of Mexico hurricane."

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "While Houston was getting ready for tropical storm Edouard, oil got hit by another more devastating storm named 'financial liquidation.' Selling pressure started on natural gas and other commodities, and West Texas Intermediate then capitulated from its defense of the first support line. The losses on crude oil are making the headlines, but the oil complex fared better than the rest of the commodity complex."

At Pritchard Capital Partners LLC in New Orleans, analysts reported, "Money continues to exit crude, gold, and other commodities, and we have seen September and October WTI trade for less than $119/bbl this morning [Aug. 5], representing a price dip of more than $28/bbl from early summer highs." September crude fell as low as $118/bbl in overnight electronic trading. "That number is about $1.50/bbl above what many technicians regard as the 'last stand' for the 2007-08 bull market. If prices break to say $116/bbl, many chartists believe that one can almost certainly proclaim that the record highs are history," the analysts said.

KBC Market Services, a division of KBC Process Technology Ltd. in the UK, noted, "Crude futures prices fell by as much as $27/bbl (18%) in just 13 trading sessions for the front month NYMEX crude contract in July, to a low of $120.42/bbl (July 29), the steepest drop ever in dollar terms in the history of crude futures trading."

Despite supply-side dangers, KBC analysts said, "It seems only a matter of time before weak demand prevails in the struggle for market supremacy; $120/bbl is now seen as a pivotal point. A drop below this level would push prices into a trading range down to previous major resistance at $100/bbl. With little recent change in fundamentals, such a move would appear to confirm that speculation has added $30-50/bbl to crude prices."

Inflation vs. Edouard
In their latest monthly report, US DOC officials said the personal consumption expenditure price index rose 0.8% in June vs. May—the largest increase since Hurricane Katrina in September 2005. Inflation has escalated 4.1% from a year ago, the largest growth rate in 17 years.

Meanwhile, Edouard made landfall early Aug. 5 in Texas near Sabine Pass with sustained winds of 65 mph, having never reached hurricane strength. The storm soaked a large part of the Gulf Coast in Texas and Louisiana but was expected to weaken as it moved northwest over Texas. On Aug. 4, the US Minerals Management Service in New Orleans said workers were evacuated from 23 of the 717 manned platforms and 6 of the 125 rigs in the Gulf of Mexico. It estimated that 0.87% of the gulf's oil production and 7.21% of its gas production were shut in ahead of the storm.

So far, there have been no reports of major damage to offshore facilities. However, a 4-day outage of the Independence Hub platform was to have ended Aug. 2 with production restored to 800-850 MMcfd. The majority owner Enterprise Products Partners said that plan was voided because of Edouard. Enterprise said it will further evaluate the situation later this week.

Shell Oil Co. said it would do regularly scheduled crew changes and redeploy the few evacuated workers in the gulf "as weather allows." Shell's Deer Park, Tex., refining and chemical plant and Motiva's Port Arthur, Tex., facility continued operations with reduced crews through the storm.

Valero Energy Corp. said its refineries in Port Arthur, Texas City, and Houston also continued to operate at slightly reduced rates. "Feedstock supply in Texas City is tight due to port closures. We do not anticipate production to be materially affected at any of our refineries," said a company spokesman. The Houston Ship Channel was closed to inbound traffic Aug. 4 due to the storm's approach.

Energy prices
The September contract for benchmark US sweet, light crudes traded as low as $119.50/bbl before closing at $121.41/bbl, down $3.68 in the regular session Aug. 4 on NYMEX. The October contract lost $3.81 to $121.41/bbl. Heating oil for September delivery dropped 8.67¢ to $3.35/gal on NYMEX. The September contract for reformulated blend stock for oxygenate blending (RBOB) was down 8.41¢ to $3/gal.

The September natural gas contract traded as low as $8.60/MMbtu before closing at $8.73/MMbtu, down 66.3¢ for the day on NYMEX. On the US spot market, gas at Henry Hub, La., gained 3.5¢ to $9.17/MMbtu.

In London, the September IPE contract for North Sea Brent crude dropped $3.50 to $120.68/bbl. The August gas oil contract continued falling, down $21.50 to $1,104/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost 28¢ to $120.80/bbl Aug. 4.

Contact Sam Fletcher at samf@ogjonline.com.

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