MARKET WATCH: Energy prices again in decline

Energy prices resumed their decline July 22 on NYMEX, wiping out all gains from the previous session as it became clear that Hurricane Dolly posed no threat to oil and gas production in the gulf.

Sam Fletcher
Senior Writer

HOUSTON, July 23 -- Energy prices resumed their decline July 22 on the New York Mercantile Exchange, wiping out all gains from the previous session as it became clear that Hurricane Dolly posed no threat to oil and gas production in the Gulf of Mexico.

The hurricane was 40 miles east of Brownsville, Tex., at 8 a.m. central time July 23, moving northwest at 8 mph. Its wind speed was 95 mph, just short of Category 2 strength. It was expected to strengthen before making landfall at midday. Texas citrus crops are in more danger from the storm than offshore oil and gas production, with 5-10 in. of rain and locally higher amounts predicted for South Texas. Widespread flooding also is expected

Last week saw the largest Monday-Friday drop for crude, "below key price points that bulls may have needed to hold onto to continue their rally," said analysts at Pritchard Capital Partners LLC, New Orleans. "Some think enough damage was done to the complex to usher in $120/bbl crude oil as the next technical 'must hold.' Even yesterday, when Dolly's path was a little less clear, oil futures subsided. Early strength for the dollar helped trigger selling Tuesday. This morning, the euro continued to come under pressure vs. the greenback."

Pritchard Capital analysts said, "Refined products futures were also weaker this morning. Prices have been steadily recovering from dizzying heights as consumers seem to push back against high prices at the pump. Yesterday, MasterCard showed a week-to-week increase for gasoline consumption, but demand levels trailed last-year levels by over 3%. In the physical market, Hurricane Dolly failed to inspire much of a move higher. US Gulf Coast gasoline fell to the lowest point in almost 2 months. It's typical behavior for 2008. Gulf gasoline has refused to stage any significant rallies independent of the NYMEX this year. It's also typical behavior for this time of year."

The analysts continued: "A July tropical system has never provoked a major rally in the modern era of gulf refined products trading. But analysts note that the named storm count so far in 2008 is approximately the same as in the hyperactive 2005 season. It's thought that speculative buying ahead of hurricanes might be aimed at the middle of the barreldistillateswhich have held onto premiums to futures this year. Even so, distillates traded in a tight range to futures yesterday in the gulf."

US inventories
The Energy Information Administration reported July 23 that commercial US crude inventories fell 1.6 million bbl to 295.3 million bbl during the week ended July 18, exceeding a Wall Street consensus of a 700,000 bbl draw. Gasoline stocks jumped by 2.9 million bbl to 217.1 million bbl in the same period, vs. Wall Street's expectations of a 100,000 bbl decline. Only the distillate fuel consensus was on target, with inventories up 2.4 million bbl to 128.1 million bbl. Propane and propylene inventories were up 300,000 bbl to 45.3 million bbl.

Imports of crude into the US fell 985,000 b/d to 9.8 million b/d in that same week. Input of crude into US refineries was down 355,000 b/d to 15.1 million b/d, with refineries operating at 87.1% of capacity. Gasoline production rose to 9.2 million b/d during that period, while distillate fuel production decreased to 4.6 million b/d.

Meanwhile, Soleil-Back Bay Research lowered its estimates of refiners' earnings in the last half of this year through 2009 primarily on expectations that weak demand for refined products will continue over the next 12-18 months. "Coupled with rising US refining capacity in 2010-11, refining margins and earnings are likely to remain under pressure throughout the remainder of the decade," said analyst Jacques H. Rousseau. "Absent a reduction in supply (due to a hurricane-like event) we anticipate that light sweet crude refiners will find it difficult to make money and will be forced to lower production further. However, heavy sour refining capacity should remain profitable."

Energy prices
The expiring August contract for benchmark US light, sweet crudes traded as high as $132.07/bbl July 22 on NYMEX before closing at $127.95/bbl, down $3.09 for the day. The September contract lost $3.40 to $128.42/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $3.09 to $127.95/bbl. Heating oil for August delivery declined 6.97¢ to $3.68/gal on NYMEX. The August contract for reformulated blend stock for oxygenate blending (RBOB) dropped 7.01¢ to $3.15/gal.

The August natural gas contract traded as low as $9.89 MMbtu prior to closing at $10.07 MMbtu, down 44.3¢ on NYMEX. On the US spot market, gas at Henry Hub, La., fell 39.5¢ to $10.13/MMbtu.

In London, the September IPE contract for North Sea Brent crude lost $3.06 to $129.55/bbl. Gas oil for August dropped $21.50 to $1,190.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes slipped by 29¢ to $127.43/bbl on July 22.

Contact Sam Fletcher at samf@ogjonline.com.

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