MARKET WATCH: Crude, natural gas prices fall moderately

July 24, 2007
The new front-month crude contract fell below $75/bbl July 23 while natural gas plunged 6% to its lowest closing since December on the New York futures market.

Sam Fletcher
Senior Writer

HOUSTON, July 24 -- The new front-month crude contract fell below $75/bbl July 23 while natural gas plunged 6% to its lowest closing since December on the New York futures market.

Natural gas was down moderately in early trading July 24. "Higher storage injections due to a lack of sustained summer heat to boost cooling demand continue to put downward pressure on natural gas prices," said analysts in the Houston office of Raymond James & Associates Inc. They said last week's startup of gas production through the Independence Hub facility in the Gulf of Mexico had a negative impact on gas futures prices.

Gas outlook
However, analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR), Arlington, Va., said the natural gas market has not yet recognized the global effect of the 6.8 magnitude earthquake on July 16 that damaged Tokyo Electric Power Co.'s 8,200-Mw Kashiwazaki-Kariwa nuclear power plant—the world's largest—135 miles northwest of Tokyo. That incident "has the possibility of raising global LNG demand by nearly 970 MMcfd," they said.

"Any unexpected changes in global demand will mean lower US imports. We expect second half LNG imports to drop 810 MMcfd" to 1.63 bcfd, said FBR analysts. "This drop in imports will amply offset the 200 MMcfd increase in the second half from an early Independence Hub startup (1 bcfd capacity but ramping up over 4-5 months to a 850 MMcfd maximum sustained output)."

FBR's assessment "reiterates the global btu approach in which feed stocks rely on, complement, and replace one other based on relative cost and efficiency," the analysts said. "Following the dispatch curve, lost nuclear generation translates into a call on gas and oil (if no other base load capacity is available). This is the framework under which we operate, and more and more, LNG provides the linkage as a flexible, fungible alternative."

Oil markets
Raymond James analysts reported oil prices were down "for the third straight day" in premarket trading July 24 based on statements by officials of the Organization of Petroleum Exporting Countries indicating they may consider a production increase during their September meeting. "The erosion of the oil bubble, as measured by OPEC's excess capacity, is a central supporting theme for the long-term secular bull market for energy. A combination of increasing global oil demand and natural OPEC production declines have caused OPEC's excess productive capacity to diminish substantially," the analysts said.

Also affecting the oil market was the weekend restart of Chevron Corp.'s 200,000 b/d crude distillation unit at its refinery in El Segundo, Calif., and speculation that the government will report July 25 a build in both gasoline and heating oil inventories.

US Department of Energy statistics released this week show "that despite the OPEC supply cuts, the US has been receiving more crude oil imports from OPEC than last year," Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "Losses from Nigeria and lower imports from Iraq were offset by higher imports from Saudi Arabia, Algeria and Angola. On a year-to-date basis, imports from OPEC are also higher than a year ago," he said.

Imports from Saudi Arabia were at a 13-month high in May, replacing Mexico as the second-largest supplier of crude to the US, behind Canada. The other 12 top US suppliers were Venezuela, Nigeria, Angola, Algeria, Iraq, Russia, Ecuador, the UK, Kuwait, Brazil, Norway, and the Congo.

Energy prices
The September contract for benchmark US light, sweet crudes opened at the day's high of $75.69/bbl July 23 and traded as low as $74.44/bbl before closing at $74.89/bbl, down 90¢ for the day on the New York Mercantile Exchange. The October contract lost 77¢ to $74.78/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 88¢ to $74.70/bbl. Heating oil for August delivery declined by 3.61¢ to $2.06/gal on NYMEX. The August contract for reformulated blend stock for oxygenate blending (RBOB) dropped 6.05¢ to $2.10/gal.

The August natural gas contract fell 40.7¢ to $6.04/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., tumbled by 49.5¢ to $5.95/MMbtu.

In London, the September IPE contract for North Sea Brent crude dropped 78¢ to $76.86/bbl. Gas oil for August lost $8.50 to $646.25/tonne.

The average price for OPEC's basket of 11 reference crudes fell 66¢ to $73.01/bbl on July 23.

Contact Sam Fletcher at [email protected].