MARKET WATCH: Crude prices fall on yet another bearish report

Feb. 6, 2008
The front-month crude contract fell below $89/bbl Feb. 5 on yet another bearish economic report that the services sector may be weaker than expected.

Sam Fletcher
Senior Writer

HOUSTON, Feb. 6 -- The front-month crude contract fell below $89/bbl Feb. 5, wiping out the previous day's gains in the New York futures market, on yet another bearish economic report that the services sector may be weaker than expected.

The Institute for Supply Management's nonmanufacturing index fell to a reading of 41.9% for January, down from 54.4% in December and well below the 53% reading that many economists had expected. That is both the largest single-month drop and the second-lowest reading ever in the index's history. It also is the first reading since March 2003 that dipped below 50%, indicating that most services sector firms are contracting.

"This reading, as well as several other data points within the past few weeks, renewed fears about an economic recession materializing," said analysts in the Houston office of Raymond James & Associates Inc.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "A dollar index much stronger, equity markets much weaker, a small contango on West Texas Intermediate, an increasing contango and a lower crack on gasoline, a lack of proper winter, a lack of proper geopolitics—if it was not for short speculators having been scared out of the oil markets during the course of 2007, we would be today at lower price levels on crude oil."

However, crude futures were up slightly in early trading Feb. 6, partly on "news of BHP Billiton Ltd.'s bid to acquire Rio Tinto PLC [a multinational resources group] for nearly $150 billion, which would be the second-largest takeover in history," Raymond James analysts reported.

US inventories
The Energy Information Administration reported Feb. 6 that commercial US crude inventories escalated by 7 million bbl to 300 million bbl in the week ended Feb. 1. Gasoline stocks increased by 3.6 million bbl to 227.5 million bbl in the same period. Distillate fuel inventories gained 100,000 bbl to 127.1 million bbl, while propane and propylene inventories lost 3.9 million bbl to 38.5 million bbl.

Imports of crude into the US increased by 458,000 b/d to 10.5 million b/d in that same period. However, the input of crude into US refineries declined by 126,000 b/d to 14.5 million b/d with refineries operating at 84.3% of capacity. Gasoline production decreased to 8.7 million b/d as distillate fuel production increased to 4 million b/d.

"Refined product inventories increased more than expected…due to lower demand and higher imports. However, the average refinery utilization rate continued to fall, suggesting lower production in the coming weeks," said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research.

Energy prices
The March crude contract of benchmark US sweet, light crudes dropped $1.61 to $88.41/bbl Feb. 5 on the New York Mercantile Exchange. The April contract fell $1.62 to $88.45/bbl. On the US spot market, WTI at Cushing, Okla., was down $1.60 to $88.42/bbl. The March heating oil contract lost 3.68¢ to $2.45/gal on NYMEX. The March contract for reformulated blend stock for oxygenate blending (RBOB) declined by 4.7¢ to $2.26/gal.

The March natural gas contract continued to climb, however, up 7.3¢ to $7.94/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., jumped by 24¢ to $7.85/MMbtu.

In London, the March IPE contract for North Sea Brent fell $1.65 to $88.82/bbl. Gas oil for February dropped $15 to $784.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 benchmark crudes declined 57¢ to $86.45/bbl on Feb. 5.

Contact Sam Fletcher at [email protected].