MARKET WATCH: Energy prices fluctuate in uncertain markets

Energy prices continued to waffle, declining Sept. 26 amid uncertainties about the international economy, the value of the US dollar, and global energy demand through 2009.

Sam Fletcher
Senior Writer

HOUSTON, Sept. 29 -- Energy prices continued to waffle, declining Sept. 26 amid uncertainties about the international economy, the value of the US dollar, and global energy demand through 2009.

"Despite Congress having reached agreement over the weekend on the $700 billion bailout package to stabilize the US financial system, oil prices are down more than 4% premarket [Sept. 29] as the US dollar gained versus the euro and amid continuing macroeconomic concerns," said analysts in the Houston office of Raymond James & Associates Inc. "The bailout agreement, which will be voted on today in the House, would allow the US government to purchase devalued mortgage related assets from financial institutions in order to unfreeze the credit markets. The broader market remains skeptical as to whether the package will be enough to prevent the economic downturn from persisting or even spreading to other major economies, further pressuring oil prices."

Commodity Futures Trading Commission data show a general reduction of index positions since early June. Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The combination of the risk of more regulatory oversight and the erosion of the macro growth theme could lead to further reduction of investments in commodity indices. If that was to be the case there would be a very severe liquidity risk on these commodities that have most of their long positions in the hands of index traders. Positions held by index traders have been cut on average by 20% since early June, but since global open interest has also fallen, it has not necessarily reduced the risk concentration on certain commodities."

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "The outlook for global equity, interest rate, and exchange rate markets has become increasingly uncertain." He said, "We believe commodities will be unable to escape the contagion with the complex prone to overshooting risks both to the upside and downside. From a commodity perspective our most pressing concern is to what extent the US virus spreads globally and specifically to China. For many commodities such as aluminum and crude oil, China represents a significant share of global consumption growth. We expect demand destruction fears into early 2009 will bear down on many commodity prices. We have reduced our 2009 oil and gas price forecasts by circa 20%, but we stand by our 2010 oil price forecast of $100/bbl."

Sieminski noted many commodity indices have surrendered at least 70% of their gains from the first half of this year. "Despite the risk of a weaker US dollar boosting prices, we believe a deteriorating economic and financial environment will drive global oil demand growth lower and pressure oil prices downward into 2009. We also look for contango to return to the crude oil market." As for natural gas, he said, "In addition to weak US economic growth, we believe natural gas prices are being negatively impacted by strong growth in US domestic production, which we see tapering off only in late 2009."

On the other hand, Raymond James analysts said, "We recognize that the recent intense oil market volatility has unnerved many energy investors. However, with the Organization of Petroleum Exporting Countries stepping in and demonstrating its intention to defend a $100/bbl floor, we believe oil is in the process of bottoming. Not withstanding the possibility of a global economic meltdown, oil looks set to rebound into 2009." They said specific bullish fundamental drivers include:

-- Lack of non-OPEC production growth.

-- Low US oil inventories.

-- Continuing economic growth from the Middle East, Asia, and Africa.

-- Minimal excess capacity in OPEC.

"While there will always be oil price volatility, if anything, OPEC's challenge in the long run may very well be keeping a lid on oil prices so as not to create major economic dislocations," said Raymond James.

Meanwhile, the US Minerals Management Service reported 145 of the 694 manned production platforms and 1 of the 116 mobile rigs operating in the US sector of the Gulf of Mexico were still without crews as of midday Sept. 26. Officials said 57.4% of the oil and 52.8% of the gas usually produced from offshore federal leases are still shut in.

There are growing signs that the amount of oil production shut in by Hurricanes Gustav and Ike is far greater than initially indicated. Refineries were badly hit, and lack of electrical power has slowed their return to capacity so that less crude has been processed after Gustav and Ike this month than after Katrina and Rita in 2005. With several downed US refineries not taking deliveries, Mexico was forced to reduce its oil production by 250,000 b/d. As a result, distributors have drawn down US gasoline inventories to the lowest level in 41 years. However, loss of supplies has been offset by a drop in demand and slower economic growth exacerbated by the financial crisis.

Energy prices
The November contract for benchmark US light, sweet crudes dropped $1.13 to $106.89/bbl Sept. 26 on the New York Mercantile Exchange. The December contract lost $1.03 to $106.18/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.12 to $106.90/bbl. Heating oil for October delivery declined 3.09¢ to $2.99/gal on NYMEX. The October contract for reformulated blend stock for oxygenate blending (RBOB) dropped 3.22¢ to $2.67/gal.

Natural gas for the same month fell 25.2¢ to $7.47/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 13¢ to $7.45/MMbtu.

In London, the November IPE contract for North Sea Brent crude dropped $1.06 to $103.54/bbl. October gas oil fell $5.25 to $962.75/tonne.

Despite strong price fluctuations, the November contract for benchmark crude finished the week $4.14/bbl higher than it started. North Sea Brent was up by $3.93/bbl. October contracts for RBOB and heating oil gained $2.70/bbl and $4.10/bbl, respectively. Gas oil increased by $7.54/bbl, but November natural gas in the New York futures market was down 2.8% for the week.

The average price for OPEC's basket of 13 reference crudes gained 22¢ to $97.90/bbl on Sept. 26. So far this year, OPEC's basket price has averaged $108.27/bbl.

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