MARKET WATCH: Oil price declines from record high

Sam Fletcher
Senior Writer

HOUSTON, July 1 -- Oil prices retreated June 30, but not without first registering another record high, $143.67/bbl, in intraday trading on the New York Mercantile Exchange.

Moreover, analysts in the Houston office of Raymond James & Associates Inc. said crude prices were up in premarket trading July 1 on continuing speculation that Israel may attack Iran over its nuclear program. They cited an ABC News report that quoted an unidentified Pentagon official as saying it is increasingly likely that Israel will attack Iran this year. "In addition, crude is being supported by a recent report that the Russian government is refusing work permits for a number of executives working for BP [PLC]'s Russian joint venture. This news demonstrates the tense working environment that foreign energy companies are enduring in Russia, which will ultimately lead to reduced foreign investment in Russia's energy sector and lower oil and gas production," said Raymond James analysts.

Analysts at Pritchard Capital Partners LLC, New Orleans, said July 1, "A new front month for refined products contracts and a new financial quarter was ushered in with more buying for NYMEX oil futures." They said, "Money managers have found oil to be a safer investment bet as the greenback tanks." Reports were circulating that the European Central Bank soon will raise interest rates, boosting the euro against the dollar.

Pritchard Capital analysts said, "As the futures market bounced higher yesterday morning, some spot markets disconnected." The futures contract for reformulated blend stock for oxygenate blending (RBOB) "hovered near record highs, but US Gulf Coast gasoline traded at some of the weakest levels vs. futures seen this year," Pritchard Capital reported. "Trading liquidity remains thin overall in the usually very active gulf market. The huge price tag attached to outright barrels due to the vaulting NYMEX has sidelined many players who simply can't get credit to trade. In addition, market watchers continue to note pushback from consumers that has diminished demand levels," the analysts said.

Speaking at a July 1 press conference at the World Petroleum Congress in Madrid, Nobuo Tanaka, executive director of the International Energy Agency, said, "Record prices in the oil market in recent months have become a threat to the global economy and social welfare of millions of people—some are calling it the third oil shock. While we have seen some weakening in demand in the Organization for Economic Cooperation and Development, supply constraints, refinery limitations, and continued demand growth in key emerging markets will maintain pressure in the market over the medium term," Tanaka said.

Production by members of the Organization of Petroleum Exporting Countries is "at record highs and non-OPEC producers are working at full throttle, but stocks show no unusual build," Tanaka said, adding, "These factors demonstrate that it is mainly fundamentals pushing up the price." IEA launched its new Medium-Term Oil Market Report at that meeting, reducing its global demand estimate for 2008 by 1.4 million b/d to 86.87 million b/d.

In other news, Algeria said it will keep its oil production capacity steady at 1.45 million b/d, marking the second time in 6 months it has reduced its production target. Government officials reported in December that Algeria couldn't increase output to 2 million b/d by 2010, as previously planned, because of a shortage of contractors. At that time they set the production target for 1.5 million b/d.

Energy prices
The August contract for benchmark US sweet, light crudes slipped from a record high, down 21¢, to close at $140/bbl June 30 on NYMEX. The September contract lost 17¢ to $140.58/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 21¢ to $140/bbl. The July contract for heating oil slipped 0.37¢ to $3.90/gal on NYMEX. The July RBOB contract inched up a minimal 0.03¢ to remain virtually unchanged at $3.50/gal.

The August natural gas contract climbed 15.5¢ to $13.35/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., increased 7.5¢ to $13.16/MMbtu.

In London, the August IPE contract for North Sea Brent crude lost 48¢ to $139.83/bbl. The July gas oil contract dropped $4.25 to $1,262.50/tonne.

The average price for OPEC's basket of 13 reference crudes gained 72¢ to $136.03/bbl.

Contact Sam Fletcher at samf@ogjonline.com.