MARKET WATCHEnergy prices continue downward tumble

Nov. 17, 2004
Energy prices continued to tumble Tuesday in expectation of a build in US inventories, as most traders claimed energy markets are "finally coming in line with the demand-supply equation" after earlier being "way overboard."

Sam Fletcher
Senior Writer

HOUSTON, Nov. 17 -- Energy prices continued to tumble Tuesday in expectation of a build in US inventories, as most traders claimed energy markets are "finally coming in line with the demand-supply equation" after earlier being "way overboard."

Early Wednesday, the Energy Information Administration reported US commercial inventories of crude increased by 800,000 bbl to 292.3 million bbl during the week ended Nov. 12. However, it said distillate stocks continued to fall, down 1 million bbl to 114.6 million bbl. US gasoline inventories were down by 400,000 bbl to 200.9 million bbl in the same period.

"US demand growth has not stopped, it has not weakened, and indeed so far November has been the strongest month of the year," said Paul Horsnell, Barclays Capital Inc., London. In his weekly report Wednesday, Horsnell described the latest EIA data on US demand growth as "strong across the board, taking the [year-over-year] gains for the month-to-date to 8.4% for distillate (the strongest growth this year), 3.2% for gasoline (the strongest since March), 12.8% for residual fuel oil, and 6% for total US oil demand."

Meanwhile, Horsnell said, "Diesel inventories continued their sharp decline, falling for the 11th straight week. Heating oil showed its first inventory gain in 7 weeks in aggregate, while inventories continued to slip in the key mid-Atlantic region."

Iran reacts
Iran—historically the biggest price hawk in the Organization of Petroleum Exporting Countries—became Tuesday "the first OPEC member to express concern about the recent decline in oil prices," said analysts Wednesday in a report for Raymond James & Associates Inc., St. Petersburg, Fla. "An Iranian oil official suggested that OPEC intervene to prop up the market by reducing production back to quota levels, especially in regard to the 'sour' (high sulfur) grades," they reported.

"Unless prices fall much further, it is unlikely that the more moderate Persian Gulf members will support any proposal to actually cut quotas at the [Dec. 10] meeting. However, OPEC has already adopted a 'neutral' stance, essentially thwarting any further increases in quotas," said Raymond James analysts.

Energy prices
The December contract for benchmark light, sweet crudes fell by 76¢ to $46.11/bbl Tuesday on the New York Mercantile Exchange, while the January position declined by 75¢ to $46.20/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., lost 76¢ to $46.12/bbl. Heating oil for December delivery was down by 1.62¢ to $1.33/gal on NYMEX. Gasoline for the same month lost 1.59¢ to $1.22/gal. The December natural gas contract plunged by 31.2¢ to $7.12/Mcf, wiping out gains of 26¢/Mcf from the previous session.

In London, the January contract for North Sea Brent crude dropped 75¢ to $42.29/bbl on the International Petroleum Exchange.

The average price for OPEC's basket of seven benchmark crudes dipped by 17¢ to $35.94/bbl Tuesday. "That's the lowest value for more than 4 months and less than $8 above the current OPEC target band," said Horsnell. "The value of the OPEC basket has now moved very close to what might be considered a reasonable target for OPEC to pursue, particularly given the weakening in the dollar."

He noted, " Since July, the OPEC basket has fallen from a $3[/bbl] discount to WTI to more than $10[/bbl] discount, part of the general decoupling of light from heavy crude oil values brought on by the lack of incremental cracking capacity in refineries."

Contact Sam Fletcher at [email protected]