MARKET WATCHEnergy futures prices plummet in post-Labor Day selloff

Sam Fletcher
Senior Writer

HOUSTON, Sept. 3 -- Gasoline futures prices plummeted in a post-Labor Day selloff Tuesday on the New York Mercantile Exchange, pulling down other energy commodities in the process.

Unleaded gasoline for October delivery plunged by 8.08¢ to 84.74¢/gal on NYMEX, the largest price drop for a near-month contract in a single trading session in 2 years. Yet, analysts said, gasoline prices remain at the highest level for the start of September since 2000.

Near record-high average pump prices across the nation apparently didn't discourage US motorists who took to the roads in large numbers during the recent 3-day Labor Day weekend that signaled the end of the summer driving season.

Traders in the energy futures market now are shifting their attention to the fuel oil market where inventories are at a more comfortable level than gasoline, which fell to a 3-year low during the week ended Aug. 22. However, officials at the US Energy Information Administration said in their most recent report that distillate stocks, including fuel oil, are still near the bottom of the normal range for this time of year.

US refiners have been struggling this year to build fuel inventories during a period of tight supply.

Demand wanes
"With demand easing for both natural gas and crude oil in the seasonal 'shoulder' period leading up to winter, we don't foresee much upside for either commodity near term," said Robert S. Morris, Banc of America Securities LLC, New York, in a report issued Tuesday.

"Of course, this could change if there were an unexpected terrorist or geopolitical event or a hurricane through the Gulf of Mexico," he acknowledged. "September is the peak of hurricane season, which always holds the potential to revive natural gas price momentum if Gulf of Mexico production appears that it could be interrupted."

Based on Banc of America's market models, natural gas has recaptured since late June some 2 bcfd of previously lost market, "with at least 1.5 bcfd of this due to fuel-switching from distillate fuel and perhaps as much as (500 MMcfd) from other industrial demand returning," said Morris. The remaining "backed-out demand" for natural gas "was consistently close to 5 bcfd" during August, he said.

Oil prices "should largely hinge on the balance between the resumption (of) Iraq production, which continues to be hampered by sabotage and violence, although slowly improving" and the ability of other members of the Organization of Petroleum Exporting Countries to adjust their production to accommodate Iraqi oil as it returns to market, Morris said. Like most analysts, he doesn't expect OPEC to make any major changes in production quotas at the group's scheduled Sept. 24 meeting in Vienna.

Saudi-Russian agreement
Meanwhile, Saudi Arabia and Russia signed a 5-year oil and gas cooperation agreement Tuesday that could lead to Saudi investment of as much as $25 billion in Russia's energy sector.

Under that agreement, the two large oil-producing countries would cooperate in monitoring world oil prices and coordinating oil supplies, officials said.

"The Saudis are not looking for a specific commitment in terms of Russia agreeing to maintain a certain export level or cutting output," said Julian Lee, a senior energy analyst with the Centre for Global Energy Studies, London, in an interview by the Moscow Times newspaper. "I believe they are looking for a much more general agreement in which the Russian government would state that it is interested in stabilizing oil prices at a level adequate for oil producers and not damaging for consumer countries' economies."

Saudi Arabia has the world's largest oil reserves, and Russia is the biggest oil exporter outside of OPEC. Russia produces some 8.4 million b/d of crude and exports 36%, or just over 3 million b/d.

Energy prices
The October contract for benchmark US light, sweet crudes plunged by $2.16 to $29.41/bbl Tuesday on NYMEX, while the November contract lost $1.96 to $29.35/bbl. The cash spot market for benchmark US oil Tuesday dropped $2.20 to $29.58/bbl FOB.

Heating oil for October delivery fell by 5.54¢ to 77.09¢/gal Tuesday on NYMEX. The October natural gas contract was down by 9.2¢ to $4.64/Mcf.

Driven by market expectations of weak demand and increased storage builds in coming weeks, natural gas for October delivery hit an 8-month low of $4.55/Mcf in early trading Tuesday before rebounding somewhat. "The forecasts for mild weather in the East put a lot of pressure on prices. And the big drop in crude oil prices also helped drive (gas) prices lower," said analysts Wednesday at Enerfax Daily. "Also, Hurricane Fabian is unlikely to threaten drilling in the Gulf of Mexico. It is expected to keep it well north of the Leeward Islands and away from the Bahamas and the East Coast."

On the other hand, the prospects for increased demand for natural gas got a boost Tuesday with a report by the Institute for Supply Management that US factory owners stepped up production in August to the highest level in 3 years. However, that report also said manufacturers increased the pace of layoffs.

In London, the October contract for North Sea Brent oil retreated by $1.73 to $27.52/bbl Tuesday on the International Petroleum Exchange. The October natural gas contract dropped by 6.3¢ to the equivalent of $3.02/Mcf on IPE.

The average price for OPEC's basket of seven benchmark crudes lost $1.10 to $27.52/bbl Tuesday.

Contact Sam Fletcher at [email protected]