MARKET WATCH: Oil prices fall despite conflict in Georgia

Following an early rally Aug. 11 in response to Russia's expanded military campaign in Georgia, crude futures fell to the lowest intraday price since May 1, closing below $115/bbl as traders focused on declining demand.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 12 -- Following an early rally Aug. 11 in response to Russia's expanded military campaign in Georgia, crude futures fell to the lowest intraday price since May 1, closing below $115/bbl as traders focused on declining demand.

Traders apparently shrugged off earlier reports of Russian aircraft attacks on the Baku-Tbilisi-Ceyhan pipeline that transports oil from the Azeri-Chirag Gunashli oil fields to Turkey and of shipment delays from two oil ports in Georgia (OGJ Online, Aug. 11, 2008).

"The rebound in the dollar is also playing a role in the decline of oil prices," said analysts in the Houston office of Raymond James & Associates Inc. "The dollar is approaching a 7-month high against the yen and a 5½-month high against the euro." The dollar also hit a 21-month high vs. the English pound on Aug. 11.

In New Orleans, analysts at Pritchard Capital Partners LLC noted "downdrafts" in early oil prices Aug. 12. "It did not have much of an impact on prices, but Russia halted its military operations in Georgia," they said. "While products, gasoline in particular, may have some underlying strength, weaker crude oil prices are dragging futures lower."

Meanwhile, the International Energy Agency in Paris released its monthly Oil Market Report, which Olivier Jakob at Petromatrix, Zug, Switzerland, described as "not one that will change much in the global picture." IEA revised its estimate of 2009 oil demand up by 100,000 b/d. It also increased its estimate of non-OPEC supply by 100,000 b/d.

"Hence, no change to the call-on-OPEC crude oil for 2009, a call that is 1.7 million b/d lower than current OPEC production and leaves room for a continued stock build or unforeseen supply disruption," said Jakob. Stocks of member countries of the Organization for Economic Cooperation and Development "are showing a 15 million bbl decline during June, but the IEA preliminary numbers are showing for July a build of 30 million bbl," Jakob said. "Because of the lower demand, OECD days of forward demand are not deviating much from the norm and are at the end of June, 1 day lower than in 2007 or 2006 but at par to 2005."

He said, "With the call-on-OPEC in 2009 lower than actual OPEC production, the IEA has been forced to change its tone and has moved from the peak oil rhetoric it was using during 2007 to rhetoric of easing of fundamentals. That impact of that change on the macro players and passive investors should not be underestimated."

In other news, A 5.1 magnitude earthquake shook eastern Venezuela Aug. 12, but government officials said it had no effect on oil field operations.

A large tropical wave is triggering thunderstorms in a broad area of the central Atlantic and may develop into a depression or tropical storm over the next couple of days while headed toward the Lesser Antilles. Another wave is causing showers and thunderstorms over the eastern Atlantic.

Energy prices
The September contract for benchmark US sweet, light crudes traded at $112.72-116.90/bbl Aug. 11 on the New York Mercantile Exchange prior to closing at $114.45/bbl, down 75¢ for the day. The October contract lost 74¢ to $114.66/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 75¢ to $114.45/bbl. Heating oil for September slipped by 0.85¢ to $3.12/gal on NYMEX. The September contract for reformulated blend stock for oxygenate blending (RBOB) lost 2.08¢ to $2.87/gal.

The September natural gas contract gained 10.1¢ to $8.35/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 2.5¢ to $8.20/MMbtu. Pritchard Capital analysts said, "September natural gas futures managed to stage a modest rally, but still stayed within narrow trading parameters [Aug. 11]. Traders cited tropical activity and forecasts for warm weather as being the bullish culprits, but suggest that this is a 'sell rallies' market."

In London, the September IPE contract for North Sea Brent crude was down 66¢ to $112.67/bbl. The August gas oil contract lost $1 to $1,018/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes declined by 46¢ to $111.27/bbl on Aug. 11.

Contact Sam Fletcher at samf@ogjonline.com.

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