MARKET WATCH: Crude price registers biggest 1-day drop in 4 years

The front-month crude futures price fell more than $6/bbl Aug. 22, wiping out a 4.9% rally in the previous session, because of a stronger dollar and reports that Russia was pulling out of nearby Georgia.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 25 -- The front-month crude futures price fell more than $6/bbl Aug. 22, wiping out a 4.9% rally in the previous session, because of a stronger dollar and reports that Russia was pulling out of nearby Georgia.

But in New Orleans, analysts at Pritchard Capital Partners LLC reported Aug. 25, "After the biggest single-day drop in crude prices since 2004 on Friday, oil prices lightly rebounded as traders sought bargains and as the US and Russia continue to face off." There were reports Aug. 25 that a fuel train exploded after it apparently hit a landmine on Georgia's main east-west rail line for oil exports from Azerbaijan to European markets. The extent of damage was not immediately known.

The surprise fall in crude prices after three sessions of consecutive gains last week was supported by "increased exports by Iran and a rebounding dollar, which reached a 2-year high against the pound after data indicated that the Bank of England may begin easing its monetary policy due to a slowing British economy," said analysts in the Houston office of Raymond James & Associates Inc.

"Further, signals of weakening demand continue as the American Automobile Association said that consumer travel over the Labor Day holiday is expected to be at its lowest level since 2000 due to high fuel prices. Oil is trading slightly higher this morning as Russia refuses to withdraw troops from Georgia and continues to inspect all cargo in Poti, Georgia's busiest Black Sea port," RJA continued.

Olivier Jakob at Petromatrix, Zug, Switzerland, noted that the October contract for benchmark US crude was up only 65¢/bbl by the end of last week, "but only after a series of extremely volatile sessions." North Sea Brent crude gained $1.37/bbl during that week, while reformulated blend stock for oxygenate blending (RBOB) inched up 35¢/bbl and heating oil gained 50¢/bbl.

Natural gas lost 3.1% in the same period. "West Texas Intermediate was trading in a congesting range in front of a key technical level, and large speculators were much more active than in the previous 3 weeks. They went from a net short back to a net long position on WTI futures," Jakob said.

In other news, tankers were reported loading oil from the Baku-Tbilisi-Ceyhan pipeline Aug. 25 for the first time since a fire almost 3 weeks ago shut down that main export route for Azeri crude to US and European markets. "Azerbaijan sent oil to export via Iran because of the disruption, with Iranian Oil Terminals Co. receiving the first cargo for transit yesterday," Pritchard Capital Partners reported. "Iran can handle 200,000 b/d of Caspian and Central Asian crude and could boost the volume to 500,000 b/d under swap agreements." The pipeline was reported pumping at 70% capacity and replenishing seven depots at Ceyhan, Turkey.

Meanwhile, Mexico's centrist Institutional Revolutionary Party (PRI) voted to drop from party principles the rule prohibiting private investment in Petroleos Mexicanos, the state-owned oil monopoly. Pritchard Capital Partners said PRI's support is vital for the ruling conservatives to push an energy reform bill through the divided Mexican Congress. Even if the plan is approved, Pemex officials said, it will be hard for Mexico to restore oil production to recent levels before 2020.

Energy prices
Trading for the October contract for benchmark US light, sweet crudes was volatile at $114.18-121.86/bbl Aug. 22 before closing at $114.59/bbl, down $6.59 for the day on the New York Mercantile Exchange. The November contract dropped $6.58 to $115.14/bbl. On the US spot market, WTI at Cushing, Okla., was down $6.23 to $114.70/bbl. Heating oil for September delivery lost 16.95¢ to $3.13/gal on NYMEX. The September contract for RBOB gasoline fell 17.66¢ to $2.87/gal.

The September natural gas contract dropped 40.9¢ to $7.84/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 14¢ to $7.92/MMbtu. Pritchard Capital analysts reported, "Energy traders were blindsided Friday as the surging prices across the board on Thursday transformed into even larger losses to finish the week. After a 2-day stay north of $8/MMbtu, September natural gas futures plunged below the psychological support level . . . After following petroleum futures higher on Thursday, weakness in petroleum futures Friday was listed as the main driver for slumping natural gas values."

Raymond James analysts said, "Now that the US natural gas markets are starting to realize the magnitude of the US gas supply growth problem, investors are now starting to focus on just how low US natural gas prices can go. In theory, the next fundamental (not technical) support for natural gas prices should occur when US coal plants begin to scale back output and replace the electricity with gas-fired generation."

They added, "Unfortunately, since the US has never really replaced base-load coal with natural gas-fired generation, there is no sure way to determine the exact gas price at which this 'switching' might occur. To begin with, there are numerous structural impediments to coal-to-gas switching. Even if the utilities can overcome these hurdles, the pricing decision is then dependent upon numerous, highly volatile pricing variables, including cost of coal, the type of coal, transportation costs, pollution costs, coal plant efficiencies, coal plant severance costs, gas plant efficiencies, and more. The bottom line is that anyone who tells you an exact number at which utilities will scale back coal-fired electric generation and turn on natural gas plants probably has not really thought about it. Our theoretical coal-to-gas 'switching' price is around $7/Mcf. Even if our theoretical number is right, the switching capacity is probably limited to less than 2 bcfd in 2009 before rising coal inventories begin to drive coal prices lower. In other words, coal may only provide a temporary floor for natural gas prices over the next 18 months."

In London, the October IPE contract for North Sea Brent crude dropped $6.24 to $113.92/bbl. The September gas oil contract fell $39 to $1,030.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes advanced to $114.63/bbl Aug. 22 from the revised Aug. 21 price of $113.68/bbl.

Contact Sam Fletcher at samf@ogjonline.com

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