MARKET WATCH: Uncertain economy pulls down energy prices

Sam Fletcher
Senior Writer

HOUSTON, Oct. 22 -- Energy prices fell Oct. 21 as weakened earnings and falling corporate stocks shifted traders' attention from pending production cuts at a meeting of the Organization of Petroleum Exporting Countries later this week.

The Dow Jones Industrial Average fell 231 points Oct. 21 and then dropped lower in early trading Oct. 22. Hundreds of companies are to release third-quarter earnings this week, and some that have done so already have proved disappointing.

The broader equities market fell "despite the Federal Reserve's announcement to inject more money ($540 billion to buy certificate of deposits and commercial paper from money market mutual funds) into the financial system," said analysts in the Houston office of Raymond James & Associates Inc. "Expiration of the November crude contract and fears of diminished demand led to the 4% drop in crude prices," they said.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The euro plunged and took the commodity spectrum down with it, and the overnight rise of the dollar index is even more impressive than yesterday's move." He observed, "Six months ago OPEC was complaining about the weak dollar, but it will start soon to regret these times."

Meanwhile, OPEC members have asked nonmembers such as Russia, Norway, and Mexico to join them in reducing oil production. "Notably, while Russia intends to keep its policies independent of OPEC and will not attend the meeting, Russia has indicated it may create an oil reserve to influence global prices," Raymond James analysts reported.

Jakob said, "OPEC is looking to shut down production because prices are too low for their economics. This makes an environment of spare production capacity where a return to previous record high prices will not be reached in the immediate future but where the supply side will get reduced at $50/bbl in a mirror image of the demand side getting reduced at $150/bbl." He said, "We remain of the opinion that $50/bbl would be on a medium term horizon as unsustainable as $150/bbl."

Natural gas OPEC
Russia, Iran, and Qatar—three countries that control nearly 60% of the world's gas reserves—said they are forming a "gas OPEC" for the international marketing of natural gas. Such an organization was suggested by Iran's supreme leader, Ayatollah Ali Khamenei in January 2007.

"The move may ultimately have serious ramifications for consumers, including the European Union, which receives 50% of its gas from Russia," Raymond James analysts predicted. "Expect more political posturing from the 'G3,' though it is still unclear how the coordination between the three countries will work in practice. This should have little impact on our 2009 forecast since there is not yet a truly global market for natural gas, and we anticipate only a small amount of LNG coming to the US next year."

EU leaders previously promised to oppose efforts to create a natural gas cartel that could increase European energy prices and Russia's political influence. Russia also has a tight grip on gas supplies to Europe through its control of several pipelines.

US reserves
The Energy Information Administration said Oct. 22 that commercial US crude inventories continued to climb, up 3.2 million bbl to 311.4 million bbl during the week ended Oct. 17. That surpassed the Wall Street consensus for a build of 2.3 million bbl. Gasoline stocks gained 2.7 million bbl—exactly what Wall Street expected—to 196.5 million bbl during the same period, still below average for this time of year. Distillate fuel inventories jumped by 2.2 million bbl to 124.3 million bbl, outstripping the consensus for a 100,000 bbl build. Propane and propylene inventories dipped 100,000 bbl to 61.1 million bbl that same week.

Imports of crude into the US increased 239,000 b/d to 10.4 million b/d during that period. The input of crude into US refineries jumped by 447,000 b/d to 14.6 million b/d, with units operating at 84.8% of capacity. Gasoline production dropped to 9 million b/d, however, while distillate fuel production increased to 4.4 million b/d.

Energy prices
The November contract for benchmark US light, sweet crudes traded as low as $69.77/bbl during the Oct. 21 session before closing at $70.89/bbl, down $3.36 for the day on the New York Mercantile Exchange. The December contract fell $2.21 to $72.18/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $3.36 to $70.89/bbl. Heating oil for November dropped 3.28¢ to $2.18/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) was down 2.82¢ to $1.69/gal.

Natural gas for the same month increased 10.3¢ to $6.84/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., however, fell 18.5¢ to $6.81/MMbtu. Natural gas "was the only main commodity resisting the commodity meltdown as it is less exposed to the dollar trade and is as well starting to price the arrival of winter, which should provide the first snow flurries over coming days in New England," said Jakob. "The arrival of winter is providing some support as well to the heating oil premiums and cracks. The gasoline crack is still under severe pressure with gasoline cheaper than crude."

In London, the December IPE contract for North Sea Brent crude dropped $2.31 to $69.72/bbl. Gas oil for November lost $2.75 to $688.50/tonne.

The average price for OPEC's basket of 13 reference crudes declined 31¢ to $64.32/bbl on Oct. 21.

Contact Sam Fletcher at [email protected].