MARKET WATCH: Energy prices continue downward spiral

Energy prices continued spiraling down Nov. 12, with crude positioned to test a price bottom of $55/bbl as it explores 21-month lows in the New York market.

Sam Fletcher
Senior Writer

HOUSTON, Nov. 13 -- Energy prices continued spiraling down Nov. 12, with crude positioned to test a price bottom of $55/bbl as it explores 21-month lows in the New York market.

In yet more signs of economic troubles, the US Department of Labor Department reported jobless claims jumped by 32,000 last week to a seasonally adjusted 516,000—the highest level in 7 years and exceeding Wall Street's expectations. Meanwhile, the Department of Commerce reported a bigger-than-expected fall in the US trade deficit in September, down 4.4% to $56.5 billion with a record drop in imports, led by a huge drop in oil imports.

"Crude fell to levels not seen in the last 21 months but is trading slightly higher this morning," said analysts in the Houston office of Raymond James & Associates Inc.

On Nov. 12, the average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes dropped $2.30 to $49.94/bbl. "The OPEC basket is falling below $50/bbl and the resolve of OPEC is being tested by the market," said Olivier Jakob at Petromatrix, Zug, Switzerland.

Jakob said, "OPEC has started to play the music box about possible-but-not-yet-certain additional cuts. We read the question not as to will there be an emergency meeting but as to when will it be announced. The King of Saudi Arabia is attending over the weekend the world leaders meeting in Washington, DC, and will probably not want to go there and take the blame for the world woes, so we might have to wait next week for a formal announcement. The most likely timeframe for a new emergency meeting seems to be Nov. 29 at the Organization of Arab Petroleum Exporting Countries meeting in Cairo. The Cairo gathering will make it easier than the Dec. 17 Oran meeting to implement any new cuts to the January nominations (for the same reasons the Vienna emergency meeting was moved from Nov. 18 to Oct. 24)."

Raymond James analysts noted the Paris-based International Energy Agency published its World Energy Outlook and slashed its demand forecast and non-OPEC supply estimates for 2008 and 2009. In its latest monthly report, IEA reduced its 2008 world oil demand forecast by 330,000 b/d to 86.2 million b/d, or 0.1% year-over-year growth, down from its previous estimate of 0.5% growth. The IEA slashed its 2009 demand outlook by 670,000 b/d—the largest cut in 12 years—to 86.5 million b/d, or 0.3% year-over-year growth, down from its previous estimate of 8% growth.

IEA also reduced its estimates of 2008 supply growth from non-OPEC countries, down to 60,000 b/d from 150,000 b/d previously. It decreased its 2009 non-OPEC supply growth estimate to 600,000 b/d. "This was a bearish IEA report as expected. However, we think that the IEA's demand outlook for 2009 is still too high and will likely need to be revised down," said Raymond James analysts.

US inventories
The US Energy Information Administration said Nov. 13 that commercial US crude inventories were unchanged at 311.9 million bbl in the week ended Nov. 7, despite a Wall Street consensus for a 1.2 million build. Gasoline, however, increased by 2 million bbl to 198.1 million bbl, outstripping the consensus for a 200,000 bbl advance. Distillate fuel inventories rose by 600,000 bbl to 128.4 million bbl, vs. Wall Street's consensus of 7000,000 bbl addition.

Imports of crude into the US fell by 469,000 b/d to 9.5 million b/d in that same period. The input of crude into US refineries also fell by 154,000 b/d to 14.5 million b/d with units operating at 84.6% of capacity. Gasoline production fell to 9 million b/d during that period, while distillate fuel production decreased to 4.4 million b/d.

Refined product inventories (gasoline plus distillate plus jet fuel) increased 2.7 million bbl (0.7%) last week "due primarily to soft demand," said Jacques H. Rousseau, an analyst at Soleil-Back Bay Research. "However, very weak gasoline margins have resulted in a reduction in supply with US gasoline production dropping 1% and gasoline imports falling to their lowest level since November 2005. We expect this lower supply trend to continue in the coming weeks, which should result in not only less gasoline, but also less distillate supply. This should support distillate margins, which remain in the $15-25/bbl range, and are the key variable to monitor to determine refiner profitability [in the fourth quarter]," Rousseau said.

Energy prices
The December contract for benchmark US sweet, light crudes dropped $3.17 to $56.16/bbl on the New York Mercantile Exchange. The January contract lost $3.19 to $57.03/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $3.17 to $56.16/bbl. Heating oil for December fell 9.36¢ to $1.84/gal on NYMEX. The December contract for reformulated blend stock for oxygenate blending (RBOB) declined 5.78¢ to $1.25/gal.

Natural gas for the same month lost 30¢ to $6.41/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 35.5¢ to $6.62/MMbtu.

In London, the December IPE contract for North Sea Brent crude dropped $3.34 to $52.37/bbl. The November gas oil contract was unchanged at $610.25/tonne.

Contact Sam Fletcher at samf@ogjonline.com.

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