MARKET WATCH: Stagnant economy undercuts energy prices

After rising marginally on Sept. 1, crude oil prices dropped 2% in early trading Sept. 2 in the New York market when the US Department of Labor reported the economy added no new jobs in August, with the unemployment rate still at 9.1%.

A weak manufacturing report from China and the lingering debt crisis in Europe fed fears of a declining global economy that would generate less demand for energy. Oil prices fell as the dollar rose against the euro and other currencies.

In yesterday’s regular trading session, crude oil prices found some support from closure of several production platforms ahead of a tropical depression in the Gulf of Mexico that is expected to strengthen into Tropical Storm Lee before coming ashore in Louisiana over this long US Labor Day holiday weekend. Natural gas prices were essentially flat Sept. 1 but fell in early trading, said analysts in the Houston office of Raymond James & Associates Inc.

“The Bureau of Ocean Energy Management indicates that shut-in volumes are roughly 7% of oil production and 2% of natural gas production from the gulf. Bottom Line: In the thick of hurricane season, production shut-ins and possible demand destruction from storm-related damage could have meaningful impacts on oil and natural gas prices,” they reported.

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “The fortunes of [North Sea] Brent remain closely tied to the Standard & Poor’s 500 index. Assuming the soft patch in economic activity does not evolve into a full blown recession, we expect equity and oil prices will rally during the fourth quarter of this year.”

As for refined products, he said, “US gasoline markets facing disappointing demand at home can look to Latin America and specifically Brazil as that country faces disappointing sugar production and consequently [less] ethanol supply. As a result, Latin American demand may help prevent the US gasoline balance from getting too sloppy.

Sieminski said US natural gas supply-demand fundamentals are tightening. “This is appearing in storage levels,” he said. “We estimate peak storage in November at 3.65 tcf, a comfortably low level relative to the Energy Information Administration’s estimate of capacity to store 4.1 tcf. This suggests that lack of a place to store gas is unlikely to pressure prices lower.”

He said, “The UK market has become increasingly dependent on LNG as domestic production from the North Sea continues its inexorable decline. LNG now represents roughly 29% of total supply, up from 17% in 2010, while domestic production has dropped from 49% in 2010 to 45% in 2011 year-to-date.”

Energy prices

The October contract for benchmark US light, sweet crudes increased 12¢ to $88.93/bbl Sept. 1 on the New York Mercantile Exchange. The November contract inched up 8¢ to $89.24/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 12¢ to $88.93/bbl.

Heating oil for October delivery lost 3.22¢ to $3.05/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month, however, advanced 1.64¢ to $2.89/gal.

The October contract for natural gas dipped 0.4¢ to $4.05/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., climbed 14.8¢ to $4.18/MMbtu.

In London, the October IPE contract for North Sea Brent dropped 56¢ to $114.29/bbl. Gas oil for September fell $7 to $966.50/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes declined 19¢ to $111.21/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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