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MARKET WATCH: Prices rebound on hopes for economic rescue

Sam Fletcher
Senior Writer

HOUSTON, Oct. 1 -- Buoyed by hopes the US Senate might revive the economy rescue plan torpedoed by the House of Representatives, energy prices rebounded Sept. 30, with crude again climbing above $100/bbl to recover some of the previous session's near record 1-day fall.

"The dollar index was under an extreme rally, the rest of the commodity complex was under pressure, published demand data points were weaker than expected, but oil against all odds managed to make strong gains," said Olivier Jakob at Petromatrix, Zug, Switzerland.

After 11 days of debate, the House's surprise rejection of the proposed $700 billion rescue plan finally accomplished something politicians had been promising to do all year: It brought down energy prices, with crude plummeting more than $10/bbl in a single session in the New York market (OGJ Online, Sept. 30, 2008). Unfortunately, the move also hammered business loans, personal loans, credit cards, and pension programs based on investments in equity markets. The S&P 500 Index suffered its biggest drop since the 1987 stock market crash, and losses on the Dow Jones Wilshire 5000 Index totaled $1.2 trillion, far beyond the cost of the proposed rescue plan. September ended with crude prices down almost 13% for the month and 28.1% lower for the expiring third quarter, the biggest decline since the early success of Desert Storm in 1991 when a US-led coalition repelled Iraq's invasion of Kuwait. Even so, the average crude price is still up 5% so far this year.

Meanwhile, as the US Congress fumbled for a plan, European governments bailed out three banks on that continent. The European Commission blamed the House vote for rapidly worsening European economic problems and urged swift legislative action. Venezuela President Hugo Chavez also seized the opportunity to blame the US for international financial problems, comparing the drop in oil prices to "a hundred hurricanes."

Storm aftermath
The US Minerals Management Service still listed 111 of the 694 manned production platforms and 1 of the 116 mobile rigs operating in the US sector of the Gulf of Mexico were still without crews as of midday Sept. 30, unchanged so far this week. However, officials said 57.1 % of the oil and 45.7 % of the gas usually produced from offshore federal leases are still shut in. The shut-in figure for oil was increased due to operators' errors in Sept. 29 reporting, officials said.

The Department of Energy said 1 refinery with a capacity of 348,500 b/d remained offline and another 5 refineries with total capacity of 1.33 million b/d of capacity were operating at reduced runs. They said 87,000 Texas customers were still without electrical power. DOE announced delivery of 150,000 bbl of oil from the Strategic Petroleum Reserve to Alon USA Energy Inc.'s Krotz Springs, La., refinery. Officials estimated total hurricane-related production losses at 30.5 million bbl and total SPR draws at 4.9 million bbl.

In a monthly report issued Sept. 29, DOE made a stronger-than-expected downward revision to oil demand for the month of July, down 736,000 b/d to a level 1.3 million b/d lower than in July 07. "We have to go back 10 years to find a level of demand so low for a month of July," said Jakob. "Gasoline demand in July was 5.9% lower than a year ago; demand for middle distillates was down 8.8%; and demand for jet kerosine was down 7.4%. The last time we had such a low demand for jet kerosine during the month of July was in 1996."

Jakob said, "Not only is US demand lower than in previous years but it is not even showing any of the normal seasonal increase from spring to summer. Middle distillate demand continues to be revised month after month as adjustments have still not been made in the methodology to account for the fact that the US has turned in 2008 from a net importer to a net exporter of middle distillates. The International Energy Agency stated in their latest report that they are using the weekly DOE data to make their demand forecast, hence the IEA is currently double counting about 550,000 b/d of middle distillate demand in their world supply and demand [figures]."

In other news, the latest weekly MasterCard Spending Pulse report indicated US retail gasoline sales at the pump were down 4.7% from a year ago and 5% on a 4-week average, with "no signs yet of a change in demand patterns," said Jakob.

The US Federal Highway Administration also reported Sept. 30 that travel in July on all US roads and streets was down 3.6% vs. July 2007. The cumulative decline so far this year is 3%. "When combined with the poor automobile sales, the switch from trucks to more fuel-efficient cars, we do believe that US demand for driving fuel still faces strong challenges that are not going to be over-ridden by lawmakers voting to buy the bank's toxic assets," Jakob said.

US Inventories
The Energy Information Administration reported Oct. 1 commercial US crude inventories gained 4.3 million bbl to 294.5 million bbl in the week ended Sept. 26, surpassing the Wall Street consensus of a 2.4 million bbl build. Gasoline stocks increased by 900,000 bbl to 179.6 million bbl, below average for this time of year. Wall Street was anticipating a drop of 1.7 million bbl. Distillate fuel inventories fell 2.3 million bbl to 123.1 million bbl, surpassing an expected decline of 1.6 million bbl. Propane and propylene increased by 2.5 million bbl to 58.1 million bbl.

Imports of crude into the US during that same week increased by 1.8 million b/d to 9 million b/d. The input of crude into US refineries gained by 948,000 b/d to 12.5 million b/d with units operating at 72.3% of capacity in the wake of Hurricane Ike. Gasoline production rose to 8.7 million b/d last week, while distillate fuel production increased to 3.7 million b/d.

Energy prices
The November contract for benchmark US light, sweet crudes traded at $93.36-102.46/bbl Sept. 30 before closing at $100.64/bbl, up $4.27/bbl on the New York Mercantile Exchange: That contract continued to climb in after-hours electronic trading. The December contract gained $4.17 to $100.26/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $4.26 to $100.64/bbl. Heating oil for October rose by 10.32¢ to $2.86/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) increased 8.77¢ to $2.48/gal.

The November natural gas contract escalated by 21.7¢ to $7.44/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was up 6.5¢ to $7.21/MMbtu.

In London, the November IPE contract for North Sea Brent crude gained $4.19 to $98.17/bbl. However, gas oil for October dropped $5.25 to $914.50/tonne.

The Organization of Petroleum Exporting Countries Secretariat in Vienna closed Oct. 1 for Eid al-Fitr, a major Islamic holiday at the end of the month-long fast of Ramadan, so a basket price for its 13 reference crudes was not available.

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