MARKET WATCH: Crude price at new lows on NY market

Energy prices continued to drop Dec. 2 with oil closing at a new low on the New York market, pulled down by a declining world economy and fears of reduced energy demand in the coming year.

Sam Fletcher
Senior Writer

HOUSTON, Dec. 3 -- Energy prices continued to drop Dec. 2 with crude closing at a new low on the New York market, pulled down by a declining world economy and fears of reduced demand for energy in the coming year.

In the Houston office of Raymond James & Associates Inc., analysts noted, "It was just 5 months ago when crude was trading $100/bbl more than it is now. While there are expectations for another production cut from OPEC, oil prices could continue trending lower."

However, many observers suspect member nations of the Organization of Petroleum Exporting Countries have not been consistent in complying with the 1.5 million b/d production reduction that began Nov. 1.

According to a Reuters' survey, OPEC production declined in November for the third consecutive month. However, the survey indicated only 66% of the proposed 1.5 million bbl cut has been made, not yet enough to offset the decline in oil demand. Total OPEC output was down to 31.2 million b/d in November from 32.17 million b/d in October. The 11 OPEC members supposed to comply with the group's quotas produced 28.07 million b/d in November compared with 29.06 million b/d in October.

Reuters reported most of the reductions so far have been among some OPEC members on the Gulf of Iran, with Saudi Arabia down almost 500,000 b/d. But major reductions are yet not evident among economically troubled members such as Iran and Venezuela.

Abu Dhabi's national oil company said it will supply full crude shipments to its Asian customers in January, apparently countering October notifications of December cuts to Asian markets, said refiners in Japan, South Korea, and Singapore.

Iraq, which is not currently subject to OPEC quotas, increased its production to 2.28 million b/d—still below its prewar levels.

In New Orleans, Pritchard Capital Partners LLC analysts said, "There is simply no faith that global supply will tighten in the next 60 days, and the 'great unwinding' of leverage is still an ongoing process. Oil prices are not likely to rebound until either OPEC makes a substantial production cut or the economy begins to recover and refined product demand firms up.

Meanwhile, the American Automobile Association reported Dec. 2 that US retail gasoline prices have fallen for 76 consecutive days, to an average of $1.81/gal. Probably as a result, US demand for gasoline has increased for 3 consecutive weeks, although total demand is still well below year-ago levels.

Latest data from MasterCard Advisors indicated retail sales of gasoline increased 1.7%, marking the third weekly increase above 1.5%.

The US Thanksgiving holiday in which travel usually soars was a week earlier in 2007 than in 2008, "so there is an issue of full comparability that can only be resolved with the next set of data," said Olivier Jakob at Petromatrix, Zug, Switzerland. "But the trend is clearly starting to show that the lower oil prices are starting to create a bottoming of gasoline demand destruction, offsetting some of the negative impact of higher unemployment and loss of confidence."

Jakob said, "High oil prices were the solution to demand running above production, and low oil prices will be the solution to production running above demand. The MasterCard sales data are a first warning sign that low oil prices could be starting to have a demand impact and lower."

Russia's oil exports are "another warning sign," Jakob said. "They are also starting to have a production impact. The Russian FOB (Primorsk) value of crude…minus the export tax is currently at $15.76/bbl, which will put Russian producers up against the wall until the government revises again the oil export tax."

US inventories
The Energy Information Administration said Dec. 3 commercial US crude inventories decreased by 400,000 bbl to 320.4 million bbl in the week ended Nov. 28. The Wall Street consensus was for an increase of 1.1 million bbl. Gasoline inventories fell 1.6 million bbl to 198.9 million bbl in the same period, vs. an expected increase of 1 million bbl. Distillate fuel inventories dropped 1.7 million bbl to 125 million bbl, below average for this time of year. The Wall Street consensus was for a 300,000 bbl increase in distillates. Propane and propylene inventories were flat at 60.3 million bbl.

Imports of crude into the US fell by 1.5 million b/d to 9.5 million b/d in that week. Mexico's main ports for oil export were closed by bad weather Nov. 15-18, which may have contributed to the reduction of US imports, Petromatrix's Jakob said. However, there was a strong draw from US crude inventories in the comparable week in 2007 "so the year-on-year surplus on crude oil is not likely to be greatly reduced," he said.

The input of crude into US refineries was down 258,000 b/d to 14.6 million b/d, with units operating at 84.3% of capacity. Gasoline production fell to 8.7 million b/d, while distillate fuel production dropped to 4.3 million b/d.

Energy prices
The January contract for benchmark US light, sweet crudes dropped $2.32 to $46.96/bbl Dec. 2 on the New York Mercantile Exchange. That was the lowest closing for a front-month crude contract in that market since May, 20, 2005. The February contract fell $2.25 to $48.63/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.32 to $46.96/bbl. January heating oil declined 3.19¢ to $1.58/gal on NYMEX. The January contract for reformulated blend stock for oxygenate blending (RBOB) lost 5.29¢ to $1.06/gal.

Natural gas for the same month dropped 18¢ to $6.42/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 17¢ to $6.69/MMbtu.

In London, the January IPE contract for North Sea Brent crude fell $2.53 to $45.44/bbl. Gas oil for December dropped $16.75 to $488.50/tonne.

The average price for OPEC's basket of 13 reference crudes lost $3.66 to $41.60/bbl.

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