MARKET WATCH: Crude prices drop to lowest level in 3 months

Crude prices continued falling to the lowest level in 3 months, under $113/bbl Aug. 18, as Tropical Storm Fay veered away from oil and gas operations in the Gulf of Mexico.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 19 -- Crude prices continued falling to the lowest level in 3 months, under $113/bbl Aug. 18, as Tropical Storm Fay veered away from oil and gas operations in the Gulf of Mexico.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "A stable Dollar Index and the rest of the commodity complex trading higher left West Texas Intermediate directionless and trading with no conviction on simple technicals. It tried to push through the previous high but with no follow through, then went the other way to test the $112/bbl support but still with no follow through. The product cracks were, however, under pressure; the correction in crude oil is for now providing little relief to the 3-2-1 refinery margin. The WTI September contract is expiring tomorrow and the low winter gasoline cracks will start to get broader attention."

Analysts in the Houston office of Raymond James & Associates Inc. said, "Crude is reflecting the effect of the continued rebound of the dollar, which increased to a 6-month high against the euro. In Turkey, officials are still accessing the fire-damage to the Baku-Tbilisi-Ceyhan oil pipeline (1 million b/d capacity). Officials can't say when the connection will re-open but anticipate that the pipeline would restart a few days after the repairs are finished."

Meanwhile, oil prices fell in overnight trading "as concerns about worldwide demand out weigh supply factors that offer a floor of support for prices," said analysts at Pritchard Capital Partners LLC, New Orleans.

Hurricane warnings were issued for southwestern Florida after Fay, the sixth named storm of the 2008 season, passed Key West on Aug. 18; it made landfall in Florida the morning of Aug. 19 without ever obtaining hurricane status. Although oil producers and drilling companies evacuated some offshore workers in the eastern Gulf of Mexico as a precautionary measure, the storm posed no major threat to oil and gas operations in the gulf. After earlier evacuating 425 workers, Shell Oil Co. said it expected to be back to "near-normal staffing levels by the end of the day" Aug. 19. It said the storm had no impact on its offshore production.

Meanwhile, Pritchard Capital analysts reported, "Last Friday the Organization of Petroleum Exporting Countries cut its demand forecast and this caught the market's eye. Last week the American Petroleum Institute also reported US demand for the first 7 months of the year to be the lowest in 5 years. Potential for global conflict may lend some support to prices. Many think prices will not fall below $100/bbl for crude and that there is even support at the $110/bbl mark for [WTI]. Prices have dropped for 21 of the last 24 trading sessions, so based on current trends we will soon see if the $110 mark is held with any reverence."

They said, "Retail [gasoline] prices continue to fall with some areas now seeing pump prices below the $3.50/gal mark at the cutting edge. These are markets near supply points and in states where low tax structures make it possible to sell gasoline cheaply. Tax differences are creating problems for cross-boarder retails whose state taxes are higher. Gasoline retailers in Philadelphia, for example, must compete against neighboring Camden, NJ, where state taxes are 16¢ cheaper. This creates a situation where Philadelphia prices are 20-30¢ cheaper on the cutting edge than Pittsburgh prices in the same state."

In other news, the government of Peru is threatening to use its army to break up protests at energy installations surrounded a week ago by indigenous groups protesting laws that they say will strip tribes of their land.

Energy prices
The September contract for benchmark US sweet, light crudes dropped 90¢ to $112.87/bbl Aug. 18 on the New York Mercantile Exchange. The October contract fell $1.05 to $112.89/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 89¢ to $112.88/bbl. Heating oil for September delivery declined 3.43¢ to $3.11/gal on NYMEX. The September contract for reformulated blend stock for oxygenate blending (RBOB) retreated 4.5¢ to $2.82/gal.

The September natural gas contract dropped 20.4¢ to $7.89/MMbtu on NYMEX, marking the first time since Feb. 6 that a front-month gas contract has closed below $8/MMbtu. On the US spot market, gas at Henry Hub, La., dipped by 1¢ to $7.81/MMbtu. In other news, Japanese publications report Indonesia's state-owned PT Pertamina plans to hike LNG prices by 50% when it renews long-term contracts with Japanese companies that expire in 2010-11. Indonesia provides 20% of Japan's total gas supply.

In London, the October IPE contract for North Sea Brent lost 61¢ to $111.94/bbl. The September contract for gas oil gained $12 to $1,003.25/tonne.

The average price of OPEC's basket of 13 benchmark crudes was up 80¢ to $108.68/bbl on Aug. 18.

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