MARKET WATCH: Crude price decline continues

Crude prices continued their downward slide, slipping below $129/bbl July 18, down $16.30 in 4 days of consecutive losses, following reports of declining demand and easing tensions in the Middle East.

Sam Fletcher
Senior Writer

HOUSTON, July 21 -- Crude prices continued their downward slide, slipping below $129/bbl July 18, down $16.30 in 4 days of consecutive losses—a record 1-week slide in dollar terms—following reports of declining demand and easing tensions in the Middle East.

The plunge began July 15 with the biggest 1-day loss in 17 years as US Federal Reserve chairman Ben Bernanke acknowledged a "high degree of uncertainty" in the US economic outlook. On July 18, the American Petroleum Institute said US fuel consumption was down 3% in the first half of this year, also the biggest drop for that period in 17 years. The Commerce Department said the US economy registered the weakest 6-month growth in 5 years as a result of higher energy prices.

"Trading on Friday was more notable for what was missing…, which was an expected round of short-covering ahead of the weekend due to concerns surrounding numerous tropical disturbances and East Coast heat," said analysts at Pritchard Capital Partners LLC, New Orleans.

However, analysts in the Houston office of Raymond James & Associates Inc. reported July 21, "This morning, oil and natural gas are both up roughly 2%, gaining strength from Tropical Storm Dolly, which is currently over the Yucatan Peninsula and may develop into a hurricane that could disrupt oil and gas production in the gulf. Additionally, crude benefited from inconclusive talks over Iran's nuclear development program, with Iran getting a 2-week deadline to respond to the major powers' package of incentives."

Some oil companies began evacuating offshore personnel ahead of Dolly, which is expected to become a hurricane after it enters the Gulf of Mexico. It currently is projected to come ashore near the Texas-Mexico border late July 23 or early July 24. Shell Oil Co. said it evacuated 125 people from the western gulf July 20 and plans to evacuate another 60 July 21. However, Shell officials said, "Based on current information and forecast, we do not expect any impact on Shell-operated production in the Gulf of Mexico." Dolly's projected path would take it north of Campeche Bay, where Petroleos Mexicanos produces about 1 million b/d of oil.

Meanwhile, the Centre for Global Energy Studies (CGES), London, said, "The world has been short of oil since the middle of 2006 and remains short now, although demand destruction is gathering pace and prices have fallen." CGES analysts charged, "Saudi Arabia, the one country that could supply significant additional volumes quickly, refuses to widen the discounts against benchmark grades for its heavy oil, while the Organization of Petroleum Exporting Countries continues to assert that the world is well supplied with crude and refuses to accept that production needs to rise. In the absence of additional supply, only a global recession, destroying enough demand to reduce the need for OPEC oil, can set prices on a downward path."

They reported, "Refiners are operating plants to the capacity of their upgrading units, but not to the capacity of their distillation units because the margins on straight-run processing are poor as a result of weak markets for gasoline and fuel oil. Refinery runs will only rise if it becomes profitable to process the marginal barrel of supply (Saudi Arabia's spare capacity) without cracking it. The Kingdom widened the discounts for its oil against benchmark grades until June, and prices have responded to its extra output, but it has said it will not widen them further and has cut the discounts for July and August."

CGES said, "OPEC as a whole shows no sign of being willing to increase its production. It continues to blame high oil prices on factors other than its own production policy. Moreover, it goes further than this by forecasting an unrealistic surge in non-OPEC production again this year and using this to argue that its own production is adequate. OPEC is forecasting a year-on-year increase of 560,000 b/d in non-OPEC output in 2008, even though first-half production was down by around 330,000 b/d. The OPEC forecast implies a huge increase in non-OPEC output of 1.45 million b/d in the second half of 2008. This is not an isolated incident of overestimation, for OPEC did the same thing last year and the year before that. Blaming the high oil price on speculators, the US dollar, or geopolitics, masks the underlying problem. Not enough oil is being produced to meet world demand."

Energy prices
The August contract for benchmark US light, sweet crudes declined 41¢ to $128.88/bbl July 18 on the New York Mercantile Exchange. The September contract dropped 71¢ to $129.47/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 41¢ to $128.88/bbl. Heating oil for August delivery declined 5.33¢ to $3.69/gal on NYMEX. However, the July contract for reformulated blend stock for oxygenate blending (RBOB) inched up 0.76¢ to $3.17/gal.

The July natural gas contract gained 3.3¢ to $10.57/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., fell 63.5¢ to $10.52/MMbtu.

In London, the September IPE contract for North Sea Brent crude lost 88¢ to $130.19/bbl. Gas oil for August dropped $38.75 to $1,211.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes lost $3.10 to $127.93/bbl on July 18.

Contact Sam Fletcher at samf@ogjonline.com.

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