Sam Fletcher
Senior Writer
HOUSTON, Oct. 9 -- The front-month crude futures price fell Oct. 8 to its lowest level this year on the New York market after the US Energy Information Administration reported commercial US oil inventories shot up a whopping 8.1 million bbl to 302.6 million bbl during the week ended Oct. 3.
Crude prices have plummeted 40% from a record-high of $147.27/bbl July 11. At Petromatrix, Zug, Switzerland, Olivier Jakob said benchmark US crudes traded most of the day in correlation to falling equity markets.
EIA reported gasoline stocks escalated by 7.2 million bbl to 186.8 million bbl last week, yet remained below average for that time of year. Distillate fuel inventories lost 500,000 bbl to 122.6 million bbl (OGJ Online, Oct. 8, 2008).
In Houston, analysts at Raymond James & Associates Inc. also blamed market worries about declining demand for energy worldwide. However, the crude futures price rebounded more than 3% in early trading Oct. 9 because some ministers of the Organization of Petroleum Exporting Countries are now suggesting an emergency meeting by November to discuss supply and demand.
Raymond James analysts said, "Oil continued its rapid descent in September, falling 13% to $100/bbl. It's been even worse so far in October, down 12% to under $90/bbl in only 8 days. Comments from OPEC leaders have suggested that the group might take action if prices fall meaningfully below $90/bbl, potentially before the next scheduled meeting in December."
However, Jakob said: "OPEC members would like the world to believe that they are trying to arrange an emergency meeting to defend a price level, but the reality is probably more that they are getting phone calls from refiners asking them to stop sending them crude oil. Be it in November or in December, be it formally or informally, OPEC will need to reduce production not because the price is currently too low but because there is not enough demand. The supply and demand has been for the last 2 months somewhat 'saved' by the lost output from Azerbaijan and the US Gulf Coast, but as these barrels start to come back to the market the pressure will develop further in the Atlantic Basin. The problem facing OPEC is that demand is too poor but crude prices are too high, hence the worry that prices catch up to demand before they can act; but by the same token compliance will be poor until prices are low enough."
Jakob continued: "Oil economics are simple: US refiners will not run with a negative gasoline crack. The world is moving back to financial socialism, but US refineries are not non-profit organizations, and today they are left with a choice of not running and losing $1/bbl on the crude oil backwardation or running and losing $4/bbl on their main product output. They will choose to not run, and this will back more crude into stocks. Hence the backwardation on West Texas Intermediate is starting to drop despite the still low stocks in Cushing, Okla. (delivery point for crude traded on the New York Mercantile Exchange). However, with the high credit cost for holding oil in stocks, refineries will try to shut down crude imports as they slow processing inputs."
That, he said, "is starting to send some OPEC members into panic," adding, "OPEC members know that the US will not run with a negative gasoline crack. On the basis of a more 'normal' gasoline crack, WTI is currently over-valued by between $5 and $10/bbl, which brings its net product worth very close to the $80/bbl alarm level."
Energy prices
Oil at one point fell to $86.05/bbl in intraday trade Oct. 8—the lowest price since Dec. 6, 2007, on the New York Mercantile Exchange. The November contract closed the session at $88.95/bbl, down $1.11 for the day. The December contract slipped 28¢ to $88.43/bbl. On the US spot market, WTI at Cushing was down $1.11 to $88.95/bbl. Heating oil for November declined 1.12¢ to $2.49/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending (RBOB) dropped 3.3¢ to $2.03/gal.
The November natural gas contract lost 2.6¢ to $6.74/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 15.5¢ to $6.61/MMbtu. Raymond James reported, "Natural gas continued to fall in September (6%) and so far in October (9%), and has now fallen 50% from summer peaks. While post-hurricane offshore production shut-ins (nearly 3 bcfd) remain a concern, surging onshore supply and questionable demand growth continue to weigh on prices."
In London, the November IPE contract for North Sea Brent hit a 1-year low of $81/bbl in intraday trading Oct. 8 before closing at $84.36/bbl, down 30¢ for the day. The October contract for gas oil fell $26.25 to $791.50/tonne.
The average price for OPEC's basket of 13 benchmark crudes dropped $2.66 to $77.38/bbl Oct. 8.
Contact Sam Fletcher at [email protected].
