MARKET WATCH: Credit crisis continued to deflate energy prices

Crude prices continued plumbing the lowest levels in more than a year Oct. 10 as the current credit crisis sucked funds from both the equity and commodity markets.

Sam Fletcher
Senior Writer

HOUSTON, Oct. 13 -- Crude prices continued plumbing the lowest levels in more than a year Oct. 10 as the current credit crisis sucked funds from both the equity and commodity markets.

The November contract for benchmark US light, sweet crudes dropped 17% last week on the New York Mercantile Exchange, trading as low as $77.09/bbl before closing at $77.70/bbl Oct. 10, down $8.89 for the day.

But the price picked up in premarket trading Oct. 13 as governments took action to rescue troubled banks in the US and Europe. "The UK injected $64 billion of capital to its banks; the Federal Reserve will lend unlimited funds to financial institutions; Australia and New Zealand are guaranteeing all bank deposits; and Germany, France, and Italy are expected to make similar announcements," said analysts in the Houston office of Raymond James & Associates Inc. "The slowing economy and plunge in oil prices has the Organization of Petroleum Exporting Countries worried, as the group is holding an emergency meeting in mid-November to discuss production cuts."

Encouraged by that move, the Dow Jones industrial average rebounded more than 500 points in early trading Oct. 13 after eight sessions of losses that cost the Dow nearly 2,400 points.

Nevertheless, Raymond James is lowering its average price forecasts for crude for the fourth quarter of this year and all of 2009 because the financial meltdown has depressed demand for energy. "There is a better than 50% probability that there will be a worldwide economic slowdown that results in a year-over-year decline in 2009 global oil demand," Raymond James analysts reported.

"While the first global oil demand decline in 25 years is by no means certain, it is now far more likely than it had seemed even 1 month ago. Of course there are still numerous positive long-term oil dynamics (mainly declining non-OPEC production), and there is also still a chance that strong Middle Eastern and Chinese oil demand growth offset declining demand elsewhere. That said, the outlook for global oil demand over the next 12-18 months has materially weakened, and we are lowering our 2009 oil forecast accordingly, from $130/bbl to $90/bbl," they continued.

Following a recent visit to China, analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., said Oct. 13 that China has energy shortages and strains on its energy infrastructure. The Chinese government "is very focused on making sure there is ample energy feedstock (coal) for its power grid, ample rail and port capacity to transport such feedstock, and enough oil supply and refinery capacity (both domestic and import) to meet its energy needs," they said. "We believe China's economy will demonstrate strong growth over a long period of time, as it has ample supply of cheap labor to 're-load' in the labor arbitrage…and the domestic consumption growth is significant."

However, FBR analysts said, "We are concerned that gross domestic product expectations for the 2009 near term remain too high. The range on Wall Street is from low 8% to low 9%. We are not going to predict what GDP will be in 2009, but we do believe there is a strong chance GDP comes in below 8% and could fall to the 6% range."

The Chinese government has many options, such as injecting capital into the market to spur domestic growth. But analysts warned that external and internal factors may make it harder for the government to achieve.

"First, China's real estate market is very weak. Supply is greater than demand and needs to be worked off considerably. Thus, we believe investment in this sector will decline in the next 12-18 months," analysts said. "Second, exports have slowed. Third, growth in other areas of the economy, namely domestic consumption and infrastructure, will unlikely offset the possible contraction in areas that are more materials and metals intensive (real estate). Finally, we believe that the ongoing shift in fixed-asset investment (FAI) from real estate and energy-intensive export-focused manufacturing plants to rails, roads, and subways will reduce the energy/metal intensity of the Chinese economy over the nearer term."

Other energy prices
The December crude contract lost $8.63 to $77.99/bbl Oct. 10 on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $8.90 to $77.70/bbl. Heating oil for November dropped 20.86¢ to $2.21/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) fell 22.03¢ to $1.81/gal.

The November natural gas contract lost 29¢ to $6.54/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 17¢ to $6.52/MMbtu.

In London, the November IPE contract for North Sea Brent crude dropped $8.53 to $74.09/bbl. Gas oil for October was unchanged at $788.50/tonne.

The average price for OPEC's basket of 13 reference crudes fell $5.57 to $72.67/bbl Oct. 10. So far this year, OPEC's basket price has averaged $107.07/bbl.

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