MARKET WATCH: Economic crisis pulls down energy prices

Energy prices continued to plummet Oct. 6, with crude plunging below $90/bbl to an 8-month low on the New York market in an across-the-board sell off in response to the deepening economic crisis.

Sam Fletcher
Senior Writer

HOUSTON, Oct. 7 -- Energy prices continued to plummet Oct. 6, with crude plunging below $90/bbl to an 8-month low on the New York market in an across-the-board sell off in response to the deepening economic crisis.

Natural gas futures also closed down, reaching an 11-month low in New York as the Dow Jones Industrial Average dropped below the 10,000 mark for the first time since October 2004. At the close of trading, the price of front-month benchmark US crude was down 8.5% for the year.

"The flight to cash continues, and gold was probably the only asset to be in the green [Oct. 6]," said Olivier Jakob at Petromatrix, Zug, Switzerland.

In the Houston office of Raymond James & Associates Inc., analysts said, "Stocks and energy commodities were slashed on concerns of a global economic slowdown." However, the crude futures price rebounded above $90/bbl in early trading Oct. 7 as officials of the Organization of Petroleum Exporting Countries speculated about possible production cuts to support prices.

Moreover, Raymond James analysts said, "Stocks appear set for a higher opening this morning after Australia cut its interest rate by 100 basis points, its biggest interest rate cut in 16 years, in an effort to help unfreeze credit markets. Speculation is that US and Europe may follow suit to help to boost global economies, stabilize financial markets, and loosen credit markets."

It is no longer "simply a matter of demand destruction" among member nations of the Organization for Economic Cooperation and Development offsetting strong growth in the developing world, reported KBC Market Services, a division of KBC Process Technology Ltd., Surrey, UK. If not for disruption of crude supplies due to an explosion on the Baku-Tbilisi-Ceyhan pipeline carrying crude from the Caspian Sea, rebel attacks on oil facilities in Nigeria, and the temporary shutdown of most Gulf of Mexico production by Hurricane Ike, price levels of $85/bbl "may already have been tested," said KBC analysts.

They said, "Oil demand growth in China is expected to have slowed in September and October, due to high oil stocks after the Olympics, bringing to an end a period of high imports of both diesel and gasoline. It may be the case that rising levels of oil demand destruction in the OECD have more than offset growth in the developing world, including the main oil exporting countries, in up to 4 of the 5 months between June and October."

KBC analysts said, "Market euphoria on the initial announcement of the $700 billion Wall Street bailout had melted away by the time the bill was eventually passed. The spreading effects of the credit crunch have added to fears of deterioration in the world economy. Saudi Arabia is unlikely to provide effective support until prices drop to below $80/bbl."

GOM recovery
As of midday Oct. 6, the Minerals Management Service reported only 94 of the 694 manned production platforms in the Gulf of Mexico were still without crews since before Hurricane Ike whipped through those waters. There are no longer any evacuated rigs in the gulf, MMS said. Operators' reports indicate 46.2% of the normal oil production and 40.6% of the usual natural gas production from federal leases in the gulf remain shut-in.

The Department of Energy said 2 Texas refineries with a combined capacity of 431,500 b/d are still idle, while another 9 refineries representing 2.08 million b/d of capacity are operating at reduced runs. Gulf Coast gas processing plants with a total capacity of 3.2 bcfd remain shut-in, while others with combined capacities of 6.9 bcfd are operating at reduced runs.

Energy prices
The November contract for benchmark US sweet, light crudes fell $6.07 to $87.81/bbl Oct. 6 on the New York Mercantile Exchange. The December contract dropped $6.30 to $86.71/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $6.07 to $87.82/bbl. Heating oil for November delivery lost 18.8¢ to $2.47/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) was down 16.92¢ to $2.06/gal.

Natural gas for the same month dropped 52.3¢ to $6.84/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 29¢ to $6.89/MMbtu.

In London, the November IPE contract for North Sea Brent crude lost $6.57 to $83.68/bbl. Gas oil for October plunged by $53.25 to $829.50/tonne.

The average price for OPEC's basket of 13 reference crudes fell by $4.80 to $81.57/bbl Oct. 6.

Contact Sam Fletcher at samf@ogjonline.com.

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