MARKET WATCH: Oil prices resume downward spiral

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 11 -- Oil prices resumed their downward spiral Aug. 10 in the New York market, giving back more than the gains from the previous session on disappointing trade numbers with China and reports business productivity declined for the first time in more than a year.

The market’s ups and downs would have done justice to a theme-park rollercoaster, said analysts in the Houston office of Raymond James & Associates Inc., falling in early trading on unfavorable macroeconomic news but rebounding some in the afternoon after the Federal Reserve System announced it would continue buying Treasury securities.

“The Fed's evident concerns for recovery partially offset by its remedy of additional liquidity left the market down marginally,” with the Dow Jones Industrial Average down 55 points, Raymond James analysts reported. “Oil largely followed the broader market to settle down 1.5% on the day. The productivity report supported comments from the Fed that the pace of economic recovery (and petroleum product demand) may be ‘more modest’ than expected in the near term.” They reported natural gas traded relatively flat on the futures market, down 0.6% on dissipating weather support.

The front-month crude contract dropped 1.5% “as concerns about the slowdown in recovery were bolstered by the weak economic data,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “The Labor Department reported that the US labor productivity declined by an annual rate of 0.9% in the second quarter vs. consensus of 0.1% gain.” There were additional indications the job market is struggling as labor costs increased by only 0.2% vs. a consensus for a 1.5% increase, he said.

Sharma said, “Slowing Chinese crude imports, which fell 15% month-over-month in July, added further pressure on prices. However, in the near term, a developing tropical storm in the southeast Gulf of Mexico might provide some relief to crude from the negativity of economic indicators.”

Prevailing concerns about the slowdown of economic recovery in the second half of 2010 are keeping natural gas prices under pressure as well. “Prices fell to the lowest in 10 weeks on forecasts of cooler weather moving into the Midwest and Northeast over the next few days,” Sharma said. “The Energy Information Administration now expects hurricanes will cause 146 bcf of supply loss due to shut-ins from August through October. However, we will not write off the summer cooling demand yet and expect natural gas to find more price support at these levels due to the fuel-switching.”

Pritchard Capital Partners noted a report in the Aug. 11 edition of The Wall Street Journal that energy industry insiders “are up in arms” over new disclosure rules added to pending financial regulation legislation. “The provision to the Dodd-Frank law orders resource companies to reveal royalties, bonuses, and other payments to governments for the ‘commercial development of oil, natural gas, or minerals,’” analysts said. ExxonMobil Corp. and other international oil companies “believe this level of transparency will hurt competitiveness of US integrated and E&P companies by providing competitors with specific terms of pending transactions. Inversely, the move potentially helps smaller players like Murphy Oil Corp. or Anadarko Petroleum Corp. to work their way into concessions formerly dominated by major integrated [firms],” they said.

In other news, the International Energy Agency in Paris reported crude futures prices trended higher in July on stronger financial markets and supply outages in the Gulf of Mexico and the North Sea. “By early August, prices rose to their highest level in 3 months before retreating on more comfortable supplies and concerns over the global economic recovery,” it said.

IEA revised its global oil demand estimates higher, up 2.2% to 86.6 million b/d for 2010 and up 1.5% to 87.9 million b/d in 2011, based on stronger assumptions of gross domestic product and baseline adjustments. However, it said, “Weaker economic recovery, a third lower than the base case, would cut the 2010 and 2011 prognoses by 290,000 b/d and 1.2 million b/d, respectively.”

It said global oil supply rose 850,000 b/d to 87.2 million b/d in July, as Norwegian maintenance ended and the Organization of Petroleum Exporting Countries boosted supplies. Non-OPEC supply estimates for 2010 were hiked to 52.6 million b/d, rising to 52.9 million b/d in 2011.

US inventories
The Department of Energy’s EIA said Aug. 11 commercial US crude inventories fell 3 million bbl to 355 million bbl in the week ended Aug. 6, exceeding the Wall Street consensus for a 2 million bbl drop. Gasoline stocks increased by 400,000 bbl to 223.4 million bbl, surpassing the market’s outlook for a 300,000 bbl gain. Finished gasoline inventories were virtually unchanged while blending components inventories increased. Distillate fuel inventories climbed 3.5 million bbl to 173.1 million bbl, nearly twice Wall Street’s expectation of a 1.8 million bbl gain.

Imports of crude into the US declined by 188,000 b/d to 9.4 million b/d last week, EIA reported. In the 4 weeks through Aug. 6, US crude imports averaged 10.1 million b/d, up 539,000 b/d from the comparable period in 2009. Total gasoline imports (including both finished gasoline and blending components) averaged 1 million b/d last week. Distillate fuel imports averaged 315,000 b/d.

The input of crude into US refineries dropped by 509,000 b/d to 15.1 million b/d in the week ended Aug. 6, with units operating at 88.1% of capacity. Gasoline production decreased to 9.3 million b/d, while distillate fuel production decreased slightly to 4.3 million b/d.

Energy prices
The September contract for benchmark US light, sweet crudes lost $1.23 to $80.25/bbl Aug. 10 on the New York Mercantile Exchange. The October contract dropped $1.24 to $80.71/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.23 to $80.25/bbl. Heating oil for September delivery declined 2.48¢ to $2.13/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month fell 3.34¢ to $2.09/gal.

The September natural gas contract dipped 1.2¢ to $4.30/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 10¢ to $4.43/MMbtu.

In London, the September IPE contract for North Sea Brent crude lost $1.39 to $79.60/bbl. Gas oil for August fell $11 to $669.50/tonne.

The average price for OPEC’s basket of 12 reference crudes dropped $1.41 to $76.87/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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