MARKET WATCH: Crude prices fall below $75/bbl

Sam Fletcher
Senior Writer

HOUSTON, Oct. 16 -- Energy prices continued to tumble Oct. 15 with crude falling below $75/bbl to its lowest level in more than a year, pulled down by the heavy sell-off in the equities market.

All three major equity indexes on Wall Street fell more than 7% with the Dow Jones Industrial Average suffering its second-biggest point drop ever. That increased fears that a faltering economy will undercut demand for energy. It also was reported that US retail sales fell 1.2% in September—the largest drop in 3 years and nearly twice the decline economists had expected.

It was "another day of selling across asset class, and commodities were no exceptions," said Olivier Jakob at Petromatrix, Zug, Switzerland. "One of the paradoxes is that it was energy stocks that were the largest weight on the DJIA. Lower energy prices should benefit the economy but with volatility and correlations at such a high level, they are actually accelerating the negative momentum on equity indices."

Meanwhile, Abdalla Salem El-Badri, secretary general of the Organization of the Petroleum Exporting Countries, said that group's extraordinary meeting to address current economic and market issues has been moved up to Oct. 24 in Vienna from the previous date of Nov. 18. The average price for OPEC's basket of 13 benchmark crudes dropped $4.91 to $68.58/bbl on Oct. 15.

OPEC has lowered its estimate of world demand growth for oil in 2009 by 100,000 b/d to 800,000 b/d (OGJ Online, Oct. 15, 2008). Demand growth for oil among members of the Organization for Economic Cooperation and Development has declined more than 1.8% or 1 million b/d this year primarily because of reduced consumption in the US. Non-OECD demand growth increased 1.2 million b/d through September. Total world oil demand growth for 2008 has been reduced to half of the initial forecast to 600,000 b/d. That is expected to continue in 2009, and OPEC has reduced its estimate of global demand growth by 1 million b/d to 800,000 b/d next year.

US inventories
The Energy Information Administration said Oct. 16 that commercial US benchmark crude inventories jumped by 5.6 million bbl to 308.2 million bbl, more than twice the increase expected by Wall Street analysts, during the week ended Oct. 10. Gasoline stocks shot up 7 million bbl to 193.8 million bbl, vs. a Wall Street consensus of a 3 million bbl build. Distillate fuel inventories fell 500,000 bbl to 122.1 million bbl, which is below average for this time of year. Analysts were expecting a 600,000 bbl increase. Propane and propylene inventories gained 300,000 bbl to 61.2 million bbl in the same period.

Imports of crude into the US fell 185,000 b/d to 10.2 million b/d that week. However, the input of crude into US refineries increased by 91,000 b/d to 14.1 million b/d with units operating at 82.2% of their capacity. Gasoline production rose to 9.2 million b/d, while distillate fuel production was up 4.2 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, noted that refined product inventories (gasoline plus distillate plus jet fuel) jumped by 6 million bbl (1.7%) due to higher production and weak demand. "Despite the increase, we expect distillate margins to remain above-average in the fourth quarter since inventories of the product remain 7% below the 5-year average for this calendar week. However, this negative inventory trend is likely to continue in the near term since demand is well below year-ago levels, in our view. We expect refining stock prices to remain under pressure until third quarter earnings are reported (starting the last week of October) since we forecast earnings to surprise to the upside as a result of the hurricane-related supply losses," he said.

EIA reported the injection of 79 bcf of natural gas into US underground storage in the week ended Oct. 10. That brought the amount of working gas in storage to 3.3 tcf, down 87 bcf from year-ago levels but 85 bcf above the 5-year average.

Energy prices
The November contract for benchmark US sweet, light crudes dropped $4.09 to $74.54/bbl Oct. 15 on the New York Mercantile Exchange, the lowest settlement for a front-month contract since Aug. 31, 2007. The December contract lost $4.07 to $74.88/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $4.08 to $74.55/bbl. Heating oil for November lost 6.92¢ to $2.19/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) fell 10.26¢ to $1.78/gal.

The November natural gas contract declined 13.5¢ to $6.59/MMbtu on NYMEX. A quote was not available for the US gas spot market.

In London, the November IPE contract for North Sea Brent dropped $3.73 to $70.80/bbl. The November contract for gas oil fell $39.50 to $704.75/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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