August rough on energy

Sam Fletcher
OGJ Senior Writer

August was a strenuous month for both commodity and equity markets—in fact, the worst August for the Dow Jones Industrial Average in 9 years, said analysts in the Houston office of Raymond James & Associates Inc.

In the month’s final trading session Aug. 31 on the New York Mercantile Exchange, the front-month October contract for benchmark US light, sweet crudes fell 3.7% to $71.92/bbl, compared with a closing of $78.95 July 30, the last session of that month.

Raymond James blamed the price drop in the final August session on fears Hurricane Earl would hamper East Coast travel over the long US Labor Day holiday, Sept. 4-6, which traditionally marks the end of the US summer driving season. Natural gas traders worried the category 3 storm could knock out gas-fired electrical power as it swept the Atlantic Coast from North Carolina as far north as Newfoundland and Labrador. Meanwhile, East Coast refineries prepared to shut down if threatened by the storm, possibly taking some product off the market.

Toward the end of August, crude prices struggled to regain a spot in the upper half of the $70-80/bbl trading range after being pushed lower by disappointing economic indicators, said analysts at KBC Energy Economics, a division KBC Advanced Technologies PLC in Surrey, UK.

Existing home sales were reported down 27.2% in July to a 15-year low. New housing starts in July dropped 32.4% year-on-year to a record low annual rate. House prices were reduced 4.8% in July. Moreover, the Goldman Sachs Group Inc. reported a 25-30% chance for a “double dip” recession that would again reduce energy demand and prices.

The only bright spot for the last full week of August was a Labor Department report initial claims for unemployment benefits fell for the first time in a month.

“The oil markets continue to look east towards Asia for demand growth while turning their backs on the bearish fundamentals being seen in the west,” said KBC analysts.

US inventories
The Energy Information Administration reported commercial US crude inventories gained 3.4 million bbl to 361.7 million bbl in the week ended Aug. 27. Gasoline stocks dropped 200,000 bbl to 225.4 million bbl Distillate fuel inventories fell 700,000 to 175.2 million bbl.

Import of crude into the US decreased 202,000 b/d to 9.7 million b/d in the same week. In the 4 weeks ended Aug. 27, crude imports averaged 9.6 million b/d, 530,000 b/d more than in the comparable period in 2009. The input of crude into US refineries was down 68,000 b/d to 14.8 million b/d last week, with units operating at 87% of capacity. Gasoline production declined to 9.3 million b/d in that period, while distillate fuel production decreased to 4.3 million b/d.

KBC analysts said, “Refinery utilization will have to be further reduced in the weeks ahead in order to control these ever-growing inventory levels. This will inevitably place pressure on crude prices and to test sub-$70/bbl levels in the weeks ahead unless some highly positive news starts to break.”

They said, “It is highly unlikely that the Organization of Petroleum Exporting Countries will call an extraordinary meeting prior to their scheduled gathering in mid-October; almost as unlikely as prices falling dramatically. Current production is around 2 million b/d over their agreed quota of 24.85 million b/d, but prices have resisted OPEC’s increasing output throughout the year so far. However, if oil prices fall below $70/bbl and threaten $60/bbl, there will be loud and clear messages in October by some of the more compliant countries, such as Saudi Arabia, Kuwait, and the UAE, for a concerted effort to be made by the almost non-compliant countries, such as Angola, Nigeria, Iran and Venezuela, to reduce output and prop up prices.”

However, they said, “The ever looming and considerable spare capacity of OPEC members will only be increased if this is the case; another bearish factor in the medium to long term.”

(Online Sept. 6, 2010; author’s e-mail: samf@ogjonline.com)

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