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MARKET WATCH: Energy prices retreat as dollar strengthens, demand weakens

Sam Fletcher
Senior Writer

HOUSTON, Sept. 24 -- As the US dollar strengthened and gasoline futures weakened, energy prices retreated Sept. 23, giving back some of the gains from the previous trading session when crude registered the largest 1-day gain ever.

Uncertainty about the federal government's massive banking rescue plan is putting pressure on most commodities. "While the government continues to mull over details of the government's rescue plan, the markets have slowly weakened this week. However, announced and potential equity injections into some banks should provide a bullish catalyst for the markets today," said analysts Sept. 24 in the Houston office of Raymond James & Associates Inc.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with House and Senate leaders to recommend a $700 billion capital injection to purchase bad mortgage debt from financial companies (OGJ Online, Sept. 22, 2008).

In Arlington, Va., analysts at Friedman, Billings, Ramsey & Co. Inc. said the mortgage buyout package has become an unexpected "game changer" that is "likely to alter prior expectations of odds and timing." They said, "It gets a lot harder for a chief executive to hold the line on spending while making an emergency request for $700 billion."

With both Democrat and Republican members of Congress indicating constituents' dissatisfaction with the buyout plan, FBR analysts said, "They are gaining leverage over a White House that is now $700 billion bargaining chips lighter. This increases, but does not guarantee, the prospect that the Congress will truly adjourn this week, although sources suggested both chambers could remain in session post-election to continue work related to the buyout."

Olivier Jakob at Petromatrix, Zug, Switzerland, observed, "The New York Mercantile Exchange has not made any declaration in regard to the exceptional October squeeze (but the Commodity Futures Trading Commission has subpoenaed some traders), and the front spreads on West Texas Intermediate are moving in a deeper backwardation for fears of the Cushing, Okla., stocks being abnormally low following the pipeline disruptions linked to Hurricanes Gustav and Ike." Following the Sept. 23 price spike for the expiring October contract, Stephen J. Obie, acting director of CFTC's enforcement division, said his staff would "scour" trading activity to determine if there was illegal manipulation of the market (OGJ Online, Sept. 23, 2008).

Jakob said, "The gasoline crack is coming under pressure, and we would keep a stress test for gasoline to fall below crude oil (on futures). The 3-2-1 futures refinery margin has fallen back to the prestorm weakness. The US markets still have to sort out the dislocations due to the storms but once this starts to improve we would expect the combination of low refinery margins and poor demand to put again pressure on crude oil demand and WTI spreads."

Crude futures prices were up in early trading Sept. 24 on expectations of a drop in US inventories as a result of storm disruptions. Raymond James analysts said, "Despite daily volatility, crude prices are generally experiencing an upward trend. Overall, while we note that Organization for Economic Cooperation and Development demand remains weak, we believe demand from emerging markets will be sufficient enough to cover the shortfall. Additionally, anemic non-OPEC supply growth should keep inventories tight."

US inventories
On Sept. 24, the Energy Information Administration reported commercial US crude inventories fell 1.5 million bbl to 290.2 million bbl in the week ended Sept. 19, vs. a Wall Street consensus of a 1.8 million bbl decrease. Gasoline inventories fell 5.9 million bbl to 178.7 million bbl in the same period, exceeding Wall Street's expectations of a 3.8 million bbl drop. Both finished gasoline inventories and gasoline blending components inventories decreased last week, putting gasoline stocks below average for this time of year. Distillate fuel inventories fell 4.2 million bbl to 125.4 bbl vs. a consensus for a 1.5 million bbl decline. Propane and propylene inventories increased 100,000 bbl to 55.6 million bbl that week.

Imports of crude into the US were down 1.4 million b/d to 7.1 million b/d that week after Ike struck Galveston, Tex., on Sept. 13. Input of crude into US refineries fell 1.7 million b/d to 11.5 million b/d, with units operating at 66.7% of capacity as several refineries shut down ahead of the storm; some are not back to full production yet. Gasoline production fell to 8 million b/d during the week, with distillate fuel production down to 3.3 million b/d.

Jakob said, "Making a proper forecast on the [EIA] report is too difficult due to the storms." He noted that the latest the MasterCard Spending Pulse report indicated retail gasoline demand is down 7.6% from a year ago; down 4.2% on the 4-week average; and down 25% week-on-week in the Gulf Coast region where loss of electricity due to the storm has shut down many retail outlets for an extended period. As of Sept. 23, 7% of Texas was still without electrical power.

Storm recovery
The US Minerals Management Service reported 203 of the 694 manned platforms and 4 of the 116 mobile rigs operating in the US sector of the Gulf of Mexico were still without crews as of midday Sept. 23. Officials said 66.8% of the oil and 61.6% of the gas usually produced from offshore federal leases are still shut in. The MMS reduced the total numbers of platforms and rigs in the Gulf of Mexico to reflect the 23 platforms and 5 rigs that were destroyed by Ike.

The DOE said 6 refineries (total capacity of 1.7 million b/d) remain shut down as a result of Hurricane Ike, while another 14 refineries (total capacity of 3 million b/d) are running at reduced rates. Officials said 7 natural gas processing plants (total capacity of 4.68 bcfd) in Texas and Louisiana were shut down; another 14 plants (6.23 bcfd total capacity) were restarting or operating at reduced runs.

Energy prices
The new front-month November contract of benchmark US sweet, light crudes dropped $2.76 to $106.61/bbl Sept. 23 on NYMEX. The December contract lost $3.40 to $105.47/bbl. On the US spot market, WTI at Cushing, Okla., plummeted $13.06 to $107.86/bbl, giving up most of the record $16.37/bbl gain from the previous session. Heating oil for October declined by 4.67¢ to $3/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) dropped 10.88¢ to $2.60/gal.

The October natural gas contract continued to climb, up 27.3¢ to $7.93/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated by 22¢ to $7.90/MMbtu.

In London, the November IPE contract for North Sea Brent dropped $2.96 to $103.08/bbl. The October contract for gas oil continued to rise, up $3.50 to $969.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 benchmark crudes increased $1.05 to $99/bbl Sept. 23.

Contact Sam Fletcher at samf@ogjonline.com.


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