MARKET WATCH: Economic worries pull down energy prices

The front-month crude contract approached $110/bbl during intraday trading Sept. 24 in the New York futures market but finished down for the day due to economic uncertainties and concerns about decreased demand.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 25 -- The front-month crude contract approached $110/bbl during intraday trading Sept. 24 in the New York futures market but finished down for the day due to economic uncertainties and concerns about decreased demand.

"Despite a slow recovery in Gulf of Mexico production, crude traded lower [Sept. 24] and was down premarket [Sept. 25] following weak US demand data," said analysts in the Houston office of Raymond James & Associates Inc. However, they said, "It would likely take a global recession to make us back off our bullish stance on crude. Despite some short-term help from the hurricanes, the domestic natural gas supply-demand equation remains bearish in our view."

The Department of Energy reported commercial US crude inventories fell 1.5 million bbl to 290.2 million bbl in the week ended Sept. 19, vs. a Wall Street consensus of a 1.8 million bbl decrease. Gasoline inventories fell 5.9 million bbl to 178.7 million bbl in the same period, exceeding Wall Street's expectations of a 3.8 million bbl drop. Both finished gasoline inventories and gasoline blending components inventories decreased last week, putting gasoline stocks below average for this time of year. Distillate fuel inventories fell 4.2 million bbl to 125.4 bbl vs. a consensus for a 1.5 million bbl decline (OGJ Online, Sept. 24, 2008).

"The smaller-than-expected crude draw was primarily due to a 1.7 million b/d decline in demand, partially offset by a 1.4 million b/d drop in imports," said Michael Schmitz, Banc of America Securities LLC. "Refinery utilization slid 10.7% to 66.7%, below consensus of 78.7% and the post-Katrina record low of 69.8% in 2005. Domestic production remained below 4 million b/d, down 1.2 million b/d from pre-hurricane levels." Additionally, there was a 1.4 million bbl draw from the Strategic Petroleum Reserve to help supply the market. The latest crude inventory is 9.5% below last year's level for the same period and 3.4% below the 5-year average. US demand for gasoline was 3.4% lower than a year ago, while inventory was 6.6% below last year and 10.8% under the 5-year average.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Reading the DOE statistics for times of weather disruptions remains a difficult task. The huge drop in crude oil imports in the US Gulf Coast is bearish and even more so when compared to the Petroleum Administration for Defense Districts (PADD) 3 for the Gulf Coast crude draw of only 3.1 million bbl. Crude oil imports into PADD 3 have dropped to 2.7 million b/d compared to more 'normal' levels of around 6 million b/d. As cargoes have not been discharging, the oil sitting afloat is increasing and should lead to a crude tsunami over the next 2 weeks. Stocks afloat should be well over 20 million bbl and probably closer to 30 million bbl. Mexico is now reporting shutting down some 250,000 b/d of production as it has no more storage space to handle the amount of crude oil that the US has not been taking."

Meanwhile, production of oil and gas from the Gulf of Mexico is increasing. "But here too we would not be surprised to see production being curtailed in order to clear the import overhang," Jakob said. "With refineries being shut down, the situation is necessarily opposite in the products and probably tighter than suggested in the statistics, since the DOE numbers do not reflect the stocks at the retail level. Refineries are now slowly getting back to normal, but the movement of stocks from terminals to retail could make for stocks to be reported lower than expected in the next few weeks (at least on gasoline)."

However, Schmitz said, ramp-ups of refinery production may be affected by a Sept. 24 fire at Kinder Morgan's Pasadena, Tex., oil terminal, which transports oil products from refineries on the Gulf Coast to pipelines serving the eastern and midwestern US. The tank farm, which was temporarily shut down, has a storage capacity of 15.2 million bbl.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, said, "We believe refining margins will remain above average until normal inventory levels are restored, which we do not expect to occur until around yearend 2008. This should positively impact second-half earnings for the refiners. However, we remain concerned about weak demand."

MMS update
The US Minerals Management Service reported 179 of the 694 manned platforms and 3 of the 116 mobile rigs operating in the US sector of the Gulf of Mexico were still without crews as of midday Sept. 24. Officials said 62.5% of the oil and 57.1% of the gas usually produced from offshore federal leases are still shut in.

MMS said 5 refineries (total capacity of 1.23 million b/d) remain shut down as a result of Hurricane Ike, while another 15 refineries (total capacity of 3.47 million b/d) are running at reduced rates. Officials said 7 natural gas processing plants (total capacity of 4.68 bcfd) in Texas and Louisiana were shut down; another 7 plants (3.59 bcfd total capacity) were restarting or operating at reduced runs. Officials reported 5% of Texas is still without electrical power.

MMS said some 1,450 oil and gas production platforms in the Gulf of Mexico were exposed to hurricane conditions, winds greater than 74 mph from Hurricane Ike. At last count Sept. 23, 52 of those platforms, 3 jack up drilling rigs, and 1 platform drilling rig were destroyed in that storm. MMS officials said all platforms exposed to hurricane-strength winds have the potential for minor damage, such as missing heliport skirting, missing hand rails and pieces of grating, or damaged boat landings. "Repairs and resumption of production from facilities with minor damage can be expected to occur in less than one month," they said. The 29 platforms with extensive damage to underwater structure or pipelines transporting oil and gas to shore may take 3-6 months to repair. Additional reports show 33 platforms with moderate damage to topside facilities, processing equipment, risers, or pipeline flex joints, will take 1-3 months to repair.

MMS reported six gas transmission pipeline systems were damaged. Operators are testing and inspecting pipeline systems to evaluate the full extent of any damage. Because of the large area impacted by the storm, MMS said, "This will take some time to complete the inspections."

Energy prices
The new front-month November contract for benchmark US sweet, light crudes climbed as high as $109.50/bbl Sept. 24 before closing at $105/bbl, down 88¢ for the day on the New York Mercantile Exchange. The December contract lost 45¢ to $105.02/bbl.

On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.13 to $106.73/bbl. Heating oil for October delivery gained 1.7¢ to $3.01/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) slipped by 0.03¢ to $2.59/gal.

Natural gas for the same month traded at $7.61-8.16/MMbtu Sept. 24 before closing at $7.68/MMbtu, down 25.2¢ for the day and wiping out most of its gain from the previous session on NYMEX. On the US spot market, gas at Henry Hub, La., continued to climb, up 11.5¢ to $8.01/MMbtu.

In London, the November IPE contract for North Sea Brent crude dropped 63¢ to $102.45/bbl. The October gas oil contract continued to escalate, up $17 to $986.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost 12¢ to $98.88/bbl Sept. 24.

Contact Sam Fletcher at samf@ogjonline.com.

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