MARKET WATCH: Crude price plunges more than $6/bbl

The front-month crude contract plunged more than $6/bbl July 15 in 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.

Sam Fletcher
Senior Writer

HOUSTON, July 16 -- The front-month crude contract plunged more than $6/bbl July 15 in 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.

Energy prices fell as Bernanke warned of further economic slowdown and inflation in his televised semiannual monetary policy report to the Senate Banking Committee. The August contract for benchmark US light, sweet crudes dropped $6.44 during the floor market session to close at $138.74/bbl on the New York Mercantile Exchange. "But in reality it lost $6.38/bbl in only 10 minutes," said Olivier Jakob at Petromatrix, Zug, Switzerland.

Falling energy prices stoked more political rhetoric as House Speaker Nancy Pelosi reminded voters, "The biggest drop in history came 17 years ago, when President George H.W. Bush released oil from the Strategic Petroleum Reserve in 1991 [at the start of the Desert Storm invasion to push Iraqi troops out of Kuwait] and the price per barrel dropped 34% in 1 day." She said, "President [George W.] Bush tells us that there are no quick fixesbut history proves otherwise. President Bush should free our oil by releasing a small amount of oil from the Strategic Petroleum Reserve, and bring the price down further. Obstinance does nothing to help Americans struggling with record gas prices and a host of economic concerns."

Jakob noted, "US lawmakers are trying to force the administration to release crude oil stocks from the SPR, but with the current demand destruction and poor refining economics we do not see which refinery will volunteer for SPR barrels unless they are offered at a deep discount."

He said, "While there is an endless debate as to whether the current oil prices are more a result of fundamentals or of speculation, one thing is sure and it is that intraday volatility on crude oil is starting to get out of control." Bids for August crude varied by almost $11 at $135.92-146.73/bbl during intraday trading July 15 on NYMEX. Such volatility is not "something that oil trading companies or professional speculators can handle on a longstanding basis," Jakob said.

Other factors that helped push down energy prices included the return of full production in Brazil despite a strike by oil workers in the Campos basin; the Organization of Petroleum Exporting Countries' cutting its 2008 demand forecast; and technical trading (expiration of options contracts, stop losses, etc.) in the futures market. Investor fears of the stormy US economic outlook pushed the euro to a record high of $1.6038 in the foreign exchange market. Mastercard reported retail US gasoline demand fell last week for the 11th consecutive week, despite the peak-demand summer holiday driving season underway. It said motorists have curbed spending because of higher fuel prices.

Crude futures prices continued to slide in early trading July 16. Refined products also fell, with reformulated blend stock for oxygenate blending (RBOB) leading the way. "With RBOB futures losses outpacing those seen in the crude oil arena by 82¢ on a dollar-basis yesterday, refining margins have gone from bad to worse," said analysts at Pritchard Capital Partners LLC, New Orleans.

They said, "Even on the West Coast, which continues to fetch the highest prices in the nation, refiners have very little incentive to churn out gasoline. Margins for CARBOB in Los Angeles stand at a paltry $3.41/bbl, which compares with a crack spread of $20.03/bbl this time last year. Based on recent demand figures, the outlook remains bleak."

Jakob reported, "The oil complex was the largest loser of the commodity spectrum but we did not recognize a straight pattern of across-the-board liquidation. The gasoline crack was taking another beating, trading below $3.50/bbl for the screen August crack. This makes for a further deterioration of the refinery 3-2-1 margins."

However, analysts in the Houston office of Raymond James & Associates Inc. said, "While crude is experiencing short-term volatility, we continue to remain bullish in our long-term crude forecasts. On the natural gas front, over the past 2 weeks gas has pulled back considerablyover 15%; we reiterate our stance that increasing domestic production will continue placing pressure on natural gas prices this summer."

US inventories
The Energy Information Administration reported commercial US crude inventories unexpectedly jumped by 3 million bbl to 296.9 million bbl in the week ended July 11, when the Wall Street consensus was for a 1.8 million bbl drop in supplies. Gasoline stocks increased 2.4 million bbl to 214.2 million bbl, vs. an expected decline of 200,000 bbl. Distillate fuel inventories gained 3.2 million bbl to 125.7 million bbl, exceeding the consensus of a 2 million bbl build. Propane and propylene stocks were up 1 million bbl to 45 million bbl in the same period.

Crude imports into the US increased 1.2 million b/d to 10.8 million b/d that week. Gasoline imports (including both finished gasoline and gasoline blending components) averaged 1million b/d, while distillate fuel imports were 150,000 b/d.

The input of crude into US refineries declined 21,000 b/d to 15.5 million b/d, with units operating at 89.5% of capacity. Gasoline production rose to 9.1 million b/d, and distillate fuel production increased to 4.7 million b/d.

Energy prices
The September crude contract dropped $6.41 to $139.37/bbl July 15 on NYMEX. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $6.44 to $138.74/bbl. The August RBOB contract lost 17.29¢ to $3.38/gal on NYMEX. Heating oil for the same month declined 14.59¢ to $3.92/gal.

Despite storms in the Atlantic, the August natural gas contract fell 48.2¢ to $11.48/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 13.5¢ to $11.78/MMbtu.

In London, the August IPE contract for North Sea Brent crude fell $5.17 to $138.75/bbl. Gas oil for August dropped $56 to $1,253.50/tonne.

The average price for OPEC's basket of 13 reference crudes lost $1.81to $138/bbl on July 15.

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