MARKET WATCH: Energy prices, demand continue falling

Crude futures prices fell June 4 to the lowest level in a month in the New York market among indications that demand for gasoline is declining.

Sam Fletcher
Senior Writer

HOUSTON, June 5 -- Crude futures prices fell June 4 to the lowest level in a month in the New York market among indications that demand for gasoline is declining.

The Energy Information Administration reported US crude inventories fell 4.8 million bbl to 306.8 million bbl in the week ended May 30. Gasoline stocks climbed 2.9 million bbl to 209.1 million bbl in the same period. Distillate fuel inventories increased 2.3 million bbl to 111.7 million bbl. Input of crude into US refineries increased by 183,000 b/d to 15.5 million b/d with units operating at 89.7% of capacity—the highest level since the beginning of the year and up from 87.9% the prior week. Gasoline production increased to 9.1 million b/d. Distillate fuel production increased to 4.5 million b/d as refiners ramped up output due to recent increases to refining margins (OGJ Online, June 4, 2008).

"Demand destruction was not evidenced at $80/bbl [or] $100/bbl, but it is now," said Olivier Jakob at Petromatrix, Zug, Switzerland. "West Texas Intermediate traded only a few days above $130/bbl, which means that the breaking point for the subsidized oil economies was before that level."

As a result, Jakob said, "Malaysia is lifting gasoline prices 41% and diesel 63%; India is lifting prices 10%. The list of emerging countries going through some subsidy cuts is growing and represents, so far in 2008, about 9.8 million b/d of oil demand or a third of the world oil demand growth estimated by the International Energy Agency." IEA's current forecast of global demand growth in 2008 "is already half what it was at the start of the year, and the trend is to head into one of the lowest [levels of] yearly demand growth of the decade," he said.

Most members of the Organization of Petroleum Exporting Countries still refuse to consider production increases, claiming a sufficient supply of crude is already reaching world markets. "While the high oil prices did not trigger an OPEC policy change, it did trigger a policy change in the US with lawmakers pressing for a change of the futures market regulation. The price of oil is set by the supply and demand of futures and the potential Commodity Futures Trading Commission changes can have as great an impact as an OPEC policy change. This 'solver' was not taken in account in the bull trade but is a new element that will need to be priced in," said Jacob.

Meanwhile, in a speech to the graduating class of Harvard University, Federal Reserve Chairman Ben Bernanke said the US economy is handling the current spike in oil prices better than in did in the 1970s when nominal prices were much lower.

Energy prices
The July contract for benchmark US light, sweet crudes dropped $2.01 to $122.30/bbl June 4 on the New York Mercantile Exchange. The August contract fell $2.02 to $122.68.bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.01 to $122.30/bbl. Heating oil for July delivery declined by 9.38¢ to $3.55/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) fell 15.74¢ to $3.20/gal.

The July natural gas contract dropped 15.8¢ to $12.38/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 6¢ to $12.22/MMbtu. The EIA reported the injection of 105 bcf of natural gas into US underground storage during the week ended May 30. Working gas in storage now exceeds 1.8 tcf, which is 105 bcf less than during the same period a year ago and 1 bcf below the 5-year average.

In London, the July IPE contract for North Sea Brent lost $2.48 to $122.10/bbl. The June contract for gas oil fell $35.50 to $1,146.50/tonne.

The average price for OPEC's basket of 13 benchmark crudes dropped $3.13 to $118.56/bbl on June 4.

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