MARKET WATCH: Energy prices tumble despite OPEC cut

As soon as OPEC members voted Oct. 24 to cut production by 1.5 million b/d in an effort to shore up energy markets, crude prices fell to 17-month lows in New York and London.

Oct 27th, 2008

Sam Fletcher
Senior Writer

HOUSTON, Oct. 27 -- As soon as the Organization of Petroleum Exporting Countries voted Oct. 24 to cut production by 1.5 million b/d in an effort to shore up energy markets, crude prices fell to 17-month lows in New York and London.

During intraday trading, front-month crude contracts fell as low as $62.65/bbl in New York and $61/bbl in London, the lowest levels in either market since May 2007. Although traders were expecting OPEC to reduce its official output quota of 28.8 million b/d by 1-2 million b/d, crude prices were in steep decline for 2 days prior to the meeting (OGJ Online, Oct. 24, 2008). Over the last 3 months, crude has fallen 57% from record highs above $147/bbl in what OPEC described as "a dramatic collapse unprecedented in speed and magnitude" to levels that "may put at jeopardy many existing oil projects and lead to the cancellation or delay of others, possibly resulting in a medium-term supply shortage." said OPEC ministers.

At Petromatrix, Zug, Switzerland, analyst Oliver Jakob described last week's commodities trading pattern as "another week of panic in the global markets." He noted the front-month benchmark crude contract in New York lost a total $7.98/bbl during the week while North Sea Brent was down $7.55/bbl in London. "Losses on gasoline and heating oil were about in line at $7.90/bbl while natural gas lost 8%," he said. "West Texas Intermediate is now $27/bbl lower than in the same week in 2007 and $3.40/bbl higher than the same week in 2006 or 2005."

In Houston, analysts at Raymond James & Associates Inc. said, "Prices for crude oil actually fell 5% [Oct. 24] and continue to decline in premarket trading this morning."
They said, "The market ignored OPEC's attempt to shore up prices as there are larger, long-term problems plaguing the market that a short-term production cut cannot overshadow, including softening demand, institutional un-winding, and the credit crunch. Despite efforts by the government to shore up confidence, stocks continue to sell off on worldwide fears that a recession is imminent, if not already underway. Futures are again trading down this morning, likely setting us up for what will be another volatile week."

Analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., said, "It's a tough business buying something expensive to make something cheap, and the same refiners who got pinched by high crude prices in July are getting crushed by weak demand in October." They said, "Depressed crude prices reflect weak downstream demand but also strong imports that continue to arrive ahead of year-ago levels." Imports are running 10.3 million b/d so far this month vs. an average 9.7 million b/d in October 2007, "making 'fire-sale' pricing from overseas exporters a more likely explanation than hurricane-related latency at this point," FBR analysts said.

Latest data from the Energy Information Administration show US refineries operating at an average 84.9% of capacity so far this year, including a drop to 73.7% in September because of hurricanes. That's down from an average utilization rate of 88.7% for all of 2007.

Moreover, FBR analysts pointed out the apparent recession will weaken government budgets, resulting in lower demand for petroleum products for government vehicle fleets and increased need for tax revenue. At least 27 states and the District of Columbia already face budget gaps totaling $12.3 billion for 2009. "All states except Vermont have balanced budget requirements. Most states' fiscal years begin on July 1 instead of the federal government's Oct. 1," the analysts said.

Energy prices
The December contract for benchmark US light, sweet crudes dropped $3.68 to $64.15/bbl Oct. 24 on the New York Mercantile Exchange. The January contract lost $3.66 to $64.50/bbl. On the US spot market, WTI at Cushing, Okla., was down $3.69 to $63.05/bbl. Heating oil for November declined by 8.32¢ to $1.95/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) lost 9.99¢ to $1.48/gal.

Natural gas for November dropped 18¢ to $6.24/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 41.5¢ to $6.29/MMbtu.

In London, the December IPE contract for North Sea Brent crude lost $3.87 to $62.05/bbl. Gas oil for November fell $38.50 to $628.75/tonne.

The average price for OPEC's basket of 13 reference crudes lost $2.70 to $57.57/bbl on Oct. 24. So far this year, OPEC's basket price has averaged $105.07/bbl vs. a price average of $69.08 for all of 2007.

Contact Sam Fletcher at samf@ogjonline.com.

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