MARKET WATCH: Crude oil falls below $72/bbl to 11-week low

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 25 -- Energy prices continued to tumble Aug. 24 with crude dropping 2% to an 11-week low below $72/bbl in the New York market after the National Association of Realtors reported sales of existing US homes plunged 27% to a 15-year low in July with expiration of the home-buying tax credit. Natural gas prices dipped 0.3%.

It marked the fifth successive session the price of the front-month crude contract has declined. “Dismal housing data set the tone for markets,” said analysts in the Houston office of Raymond James & Associates Inc. “Consequently, the Dow [Jones Industrial Average] made a brief appearance below the 10,000 mark before rebounding slightly to finish the day down 1.3%.” Energy prices followed the equity market's reaction to macro economic concerns and growing petroleum stockpiles that could signal a second dip in the recession.

However, analysts at Standard New York Securities Inc., part of the Standard Bank Group Ltd., reported “a brief revival” of crude prices in early trading Aug. 25, “partly due to dollar weakness.” Nevertheless, they said, “Dollar weakness has been abating, and global growth concerns now weigh on oil prices.”

Low home sales are just the latest in “the trend of macroeconomic data coming out worse than expected,” said Olivier Jakob at Petromatrix, Zug, Switzerland. Compared with the same period last year, sales are down heavily across the regions. “And that is despite the fixed mortgage rates falling to a record low during July (30-year rate),” he said.

“Given the continued deterioration in the macroeconomic data, we will continue to focus on the directional movement of the Standard & Poor’s 500 index, as the US petroleum stocks are too high to fuel any strong positive sentiment,” Jakob said.

In other news, Hurricane Danielle “is nothing to worry about as it will stay in the Mid-Atlantic,” Jakob said, “The storm off Cape Verde will be named Earl and is expected to become a strong hurricane (like Danielle), but it is expected to head north and should not be an issue for oil assets in the US Gulf of Mexico. However the National Hurricane Center currently has under watch a new disturbance that has developed right in the US gulf.” For now there is low probability it will be upgraded to tropical storm status.

US inventories
The Energy Information Administration said Aug. 25 commercial US benchmark crude inventories jumped by 4.1 million bbl to 358.3 million bbl in the week ended Aug. 20—“the third straight rise as we exit a relatively nonexistent driving season,” said Raymond James analysts. The consensus on Wall Street was for a more modest increase of 300,000 bbl. Gasoline stocks escalated 2.3 million bbl to 225.6 million bbl, whereas the market was expecting a decrease of 500,000 bbl. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories climbed 1.8 million bbl to 225.6 million bbl, exceeding traders’ expectations of a 1 million bbl build.

Imports of crude into the US increased by 320,000 b/d to 9.9 million b/d last week. In the 4 weeks through Aug. 20, crude imports averaged 9.6 million b/d, up by 589,000 b/d from the comparable period in 2009.

The input of crude into US refineries, however, declined by 348,000 b/d to 14.9 million b/d in the latest week, with units operating at 87.7% capacity. Gasoline production increased to 9.6 million b/d, while distillate fuel production increased to 4.4 million b/d.

The EIA weekly data have shown for the “past 12 consecutive weeks,” light product inventories of gasoline, distillate, and jet fuel have risen “due to high production levels, increased gasoline imports (including blend stocks), and lackluster demand,” said Jacques Rousseau, managing director of equity research, RBC Capital Markets, Reston, Va. Gasoline consumption last week was 3% higher than the comparable week last year, he said.

“After a strong second quarter, refining margins have declined sharply in August due to rising supply and lackluster demand. As a result of this weakness, we expect some refiners to lower production levels this month and coupled with the upcoming fall turnaround season (that starts in early September), lower supply should begin to reduce the current refined product inventory overhang, a potential near term positive for refining margins and stocks,” Rousseau said.

He said, “We estimate that the average US refining margin increased from approximately $7.27/bbl to $8.77/bbl over the past week (vs. an average of approximately $12/bbl in 2008 and $9/bbl in 2009).”

Energy prices
The October contract for benchmark US light, sweet crudes dropped $1.47 to $71.63/bbl Aug. 24 on the New York Mercantile Exchange. The November contract fell $1.37 to $72.36/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., broke its usual lock-step with the front-month crude futures contract and instead was down $1.89 to $71.21/bbl. Heating oil for September delivery lost 1.97¢ to $1.94/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month fell 3.16¢ to $1.84/gal.

The September natural gas contract was down 2.7¢ to $4.04/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 8¢ to $4.05/MMbtu.

In London, the October IPE contract for North Sea Brent crude fell $1.24 to $72.46/bbl. Gas oil for September lost $8.75 to $617.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes was down $1.24 to $69.69/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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