MARKET WATCH: Change in market sentiment undercuts energy prices

Crude prices continued to retreat Aug. 6, closing under $119/bbl in the New York futures market amid concerns of decreased demand for petroleum products, particularly in the US.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 7 -- Crude prices continued to retreat Aug. 6, closing under $119/bbl in the New York futures market amid concerns of decreased demand for petroleum products, particularly in the US.

"Sentiment in the oil market has become highly depressed, based mainly on what are, in our view, somewhat overblown macroeconomic and demand concerns," said Paul Horsnell, Barclays Capital Inc., London. "On futures exchanges, open interest has fallen back to the lowest level since 2006, and speculative money is now predominantly short. In terms of the overall mood, market sentiment has moved very sharply indeed through the merely downbeat into the more overtly depressive. Analysts are perhaps the worst offenders in this regard."

Horsnell sees "no structural break in the market, simply a move down from the top to the bottom of the likely trading range for the quarter, and we reiterate our $128.20/bbl forecast for the average [price] of West Texas Intermediate in the third quarter."

Meanwhile, analysts in the Houston office of Raymond James & Associates Inc. said crude prices increased in premarket trading Aug. 7 "on news that the key Turkish pipeline that pumps over 1 million b/d day from the Caspian Sea to the Mediterranean coast may take up to 2 weeks to repair." The Baku-Tbilisi-Ceyhan pipeline was closed Aug. 5 by an explosion and fire at a pump station near Refahiye in eastern Turkey (OGJ Online, Aug. 6, 2008).

In New Orleans, Pritchard Capital Partners LLC analysts noted that in overnight trading prices topped "the $120/bbl mark for WTI and the $3/gal level" for reformulated blend stock for oxygenate blending (RBOB). "Part of the momentum shift is blamed on the United Nations Security Council renewing its efforts to seek sanctions against Iran over its nuclear program. Trouble with Iran has been brewing for months, so it is back in the news," said Pritchard Capital analysts.

"Typically, declines from the peak prices have averaged about 20% over the past 5 years, making some think the drop in prices may start to slow down. Slack oil demand and concerns about the overall health of the American economy are laid beside geopolitical worries about supply as balancing points around which the market moves. All indications point to declining US oil demand, but trouble still looms in Iran and today that is dominating the news," they said.

Horsnell said: "The main supply-side risk continues to be the drift towards a nonbenign outcome in the question of Iran's external relations. With political transitions underway in both the US and Israel, it could be argued that Iran does not necessarily feel that sudden changes in the situation are likely, and thus that progress towards a resolution is likely to be slow. Indeed, if anything at this point it appears to us that the opposing positions are…moving further apart. This continues to be something of a slow-motion crisis, which tends only occasionally to re-enter more transient market sentiment. However, in our view it remains the issue with the greatest potential to produce volatility and more extreme outcomes over the next 6 months."

'Unjustified' peak prices
Crude prices were "too high at points last month, above the upper limit of what we regarded as the justifiable range for the quarter," Horsnell said. He noted benchmark US crude settled above $140/bbl "only nine" times, peaking at $145.59/bbl on the New York market during July. "Prices stayed entirely above $140 intraday on only 4 days," he said. "In other words prices never really consolidated above $140/bbl, and the usual media practice of measuring the fall from the highest intraday reading of $147.27/bbl is perhaps a little misleading. Indeed, the time involved was so limited as to suggest that very little of substance in the real world actually reflected a crude price above $140 for long enough to register." Having moved too high without fundamental support, crude prices have since "adjusted back to the bottom of the expected trading range," Horsnell said.

Recently oil traders have focused on declining US oil demand and worry that China's demand will "turn down significantly" after the Olympics end. "US demand is currently playing the key swing role on the demand side. On a large sample of countries representing more than 75% of global demand, we found that for the first 5 months of the year, demand outside the US had risen by about 1.4 million b/d, which was being kept from causing too much further price pressure by a 900,000 b/d decline in the US," said Horsnell. "There is no suggestion that total US demand is getting any worse at the moment…. We also do not expect the Olympics to mark any significant turning point in Chinese resource use."

Energy prices
The September contract for benchmark US light, sweet crudes declined 59¢ to $118.58/bbl Aug. 6 on the New York Mercantile Exchange. The October contract lost 78¢ to $118.44/bbl. On the US spot market, WTI at Cushing, Okla., was down 59¢ to $118.58/bbl. Heating oil for September dropped 4.41¢ to $3.24/gal on NYMEX. RBOB for the same month slipped by 0.71¢ to $2.95/gal.

The September natural gas contract increased 4.7¢ to $8.77/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 5.5¢ to $8.69/MMbtu. Pritchard Capital analysts said, "September natural gas futures managed to stage a modest advance as traders cited technical studies showing the likelihood of a near-term advance."

The Energy Information Administration reported Aug. 7 the injection of 56 bcf of natural gas into US underground storage during the week ended Aug. 1, raising the amount of working gas in storage to 2.5 tcf. That's 353 bcf below year-ago levels and 6 bcf below the 5-year average.

In London, the September IPE contract for North Sea Brent crude lost 70¢ to $117/bbl. The August gas oil contract fell $18 to $1,048.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes dropped $1.58 to $114.64/bbl on Aug. 6.

Contact Sam Fletcher at samf@ogjonline.com.

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