MARKET WATCH: Energy prices, demand continue to fall

Sam Fletcher
Senior Writer

HOUSTON, Aug. 13 -- Crude prices continued to tumble Aug. 12 as the US dollar strengthened amid reports of declining demand for energy.

"The Dollar Index has regained its role of a market maker in crude oil, and we could notice throughout the day some nervousness on crude oil depending on the gyration of the dollar," said Olivier Jakob at Petromatrix, Zug, Switzerland.

"Virtually everything traded slightly lower [Aug. 12] (oil, gas, energy stocks, broader market), as bearish momentum remains," said analysts in the Houston office of Raymond James & Associates Inc. "Crude prices have fallen 5% over the past few days, in spite of fighting between Georgia and Russia. Iranian officials reported that its crude stored in floating storage tanks over the past few months has now been sold, pointing to increased demand from refineries."

In New Orleans on Aug. 13, however, analysts at Pritchard Capital Partners LLC said, "Indications of a weaker dollar puffed strength back into oil futures after yesterday's losses. Prevailing winds surrounding the market have pointed to weaker prices. Fuel consumption continues to look weaker, echoing sentiments of 'demand destruction' from sources in the retail sector. US gasoline consumption slid 2% last week compared to the week before, according to the MasterCard Spending Pulse report, the first weekly decrease since the Saturday-Friday period ended July 2. Demand remains at a deficit to last year's levels at this time as well." They added, "Some analysis noted that the market has fallen far very quickly, and some might consider it oversold and look for bargains on the bid side."

Meanwhile, in its monthly report issued Aug. 12, the Energy Information Administration said US crude prices are expected to average $119/bbl this year, down from its $124/bbl forecast in July. It reduced its outlook for 2009 to $124/bbl, down from $133/bbl previously. It forecast annual average gasoline prices of $3.65/gal for 2008 and $3.82/gal for 2009. EIA's previous estimate was more than $4/gal for both years. In reducing its estimates, EIA cited slower demand growth and increased production capacity.

In its monthly Traffic Volume Trends published Aug. 13, the US Department of Transportation reported a 4.7% decline in miles driven on US streets and roadways in June from year-ago levels. Traffic volume was down 2.8% in January-June, vs. the same period in 2007. That's on top of declines of 3.7% and 2.4%, respectively, in the previous month's report.

As a precaution because of the fighting in Georgia, operator BP PLC said it closed the Baku-Tbilisi-Ceyhan pipeline that transports oil from the Azeri-Chirag Gunashli oil fields to Turkey (OGJ Online, Aug. 12, 2008). However, officials said oil is still being transported by train to the Georgian port of Batumi on the Black Sea and via an Azeri-operated pipeline.

US inventories
EIA reported commercial inventories of US crudes dipped by 400,000 bbl to 296.5 million bbl during the week ended Aug. 8. Analysts were expecting no major change in that stockpile. Gasoline stocks fell 6.4 million bbl to 202.8 million bbl in the same period, vs. a Wall Street consensus of a 1.9 million bbl decline. Distillate fuel inventories decreased 1.7 million bbl to 131.6 million bbl, vs. an expected increase to 1.9 million bbl. Propane and propylene inventories increased by 2 million bbl to 49.2 million bbl.

Imports of crude into the US dropped by 538,000 b/d to 9.7 million b/d in that same week. The input of crude into US refineries was down 216,000 b/d to 14.8 million b/d with plants operating at 85.9% of capacity. Gasoline production fell to 8.9 million b/d, while distillate fuel production decreased to 4.3 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, observed, "A combination of lower production, fewer imports, and seasonally rising demand led to a 8.7 million bbl decline (2.3%) to light product inventories (gasoline plus distillate plus jet fuel). However, given that demand growth remains very weak and refiners are operating well below capacity, we do not view this as the start of a positive trend. Our belief is that when refining margins rise, refiners will increase production and imports will rise, limiting any earnings gains for the refiners. A sustained improvement in the sector is unlikely to occur, in our view, until lower retail prices improve demand."

Energy prices
The September contract for benchmark US light, sweet crudes traded at $112.31-115.95/bbl Aug. 12 prior to closing at $113.01/bbl, down $1.44 for the day on the New York Mercantile Exchange. The October contract lost $1.53 to $113.13/bbl. Heating oil for September dropped 4.14¢ to $3.08/gal. The September contract for reformulated blend stock for oxygenate blending (RBOB) declined 2.34¢ to $2.84/gal.

The September natural gas contract lost 1.9¢ to $8.33/ MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dipped 0.5¢ to $8.19/MMbtu. Pritchard Capital analysts said, "After September natural gas futures gained barely more than a dime on [Aug. 4], bullish traders were unable to produce any follow-through momentum on [Aug. 5]." They said, "A number of market participants are targeting the $8.20/MMbtu price level as a crucial pivot point. One factor that could hinder further price cuts is storm formation in the tropics." Weather forecasters are watching two potential formations in the Atlantic basin that could develop into tropical systems.

In London, the September IPE contract for North Sea Brent crude lost $1.52 to $111.15/bbl. Gas oil for August was unchanged at $1,018.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes fell by $2.19 to $109.08/bbl on Aug. 12.

Contact Sam Fletcher at samf@ogjonline.com.

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