MARKET WATCH: Prices fall below $125/bbl for oil; $10/MMbtu for gas

Sam Fletcher
Senior Writer

HOUSTON, July 24 -- Crude futures prices fell below $125/bbl July 23 in New York as the Energy Information Administration reported a larger than expected drop in US oil inventories and an unexpected jump in gasoline stocks.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The dollar continues to rebound strongly…and the commodity complex is still in an overall correcting trend. Now that the SemGroup has been brought to bankruptcy on its oil production hedges, oil is leading the commodity complex down." SemGroup LP in Tulsa, formerly one of the largest private US firms, declared bankruptcy July 22 after incurring $3.2 billion in oil trading losses as crude prices escalated, undercutting short crude futures positions bought by the firm to hedge against its 500,000 b/d trading business.

Meanwhile, Jakob said, "The technical picture on crude oil is getting deeper into a negative momentum and open interest on West Texas Intermediate is falling to levels not seen since 2006." He said, "Technically, the $128/bbl support on WTI did not hold very long, and crude is pushed down further to test how strong the $122/bbl support can be. If $122/bbl does not hold, then we would face another accelerating wave to the next significant support level at $110/bbl.

Energy prices declined as Dolly, a Category 2 hurricane, came ashore on South Padre Island midday July 23 and then subsided to a tropical storm as it drenched South Texas. It is expected to dissipate July 25. Although the storm posed no serious threat to most oil and gas operations in the Gulf of Mexico, the US Minerals Management Service reported workers were evacuated from 62 of the 717 manned production platforms in the gulf and from 8 rigs of the 123 offshore rigs by the time the hurricane made landfall.

MMS estimated 4.47% of oil production and 7.87% of natural gas production in the gulf was shut in due to the storm. Total production from US leases in the gulf was estimated at 1.3 million b/d of oil and 7.7 bcfd of gas as of January.

The EIA 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.

"The larger-than-expected draw was primarily due to a drop in imports to 9.81 million b/d from 10.79 million b/d the prior week," said Michael C. Schmitz, Banc of America Securities LLC, New York. "Imports have averaged 9.88 million b/d year-to-date, 2.3% lower year over year. Otherwise, refinery utilization dropped 2.4% to 87.1% vs. consensus for no change as refining margins remain weak due to deteriorating product demand." So far this year, refinery utilization has averaged 86.2%, "230 basis points below the same period last year," Schmitz said. "Heating oil or high sulfur distillate fuel oil inventories built 1.231 million bbl to 31.2 million bbl, the seventh consecutive weekly build."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, reported, "Weak demand led to a 6.3 million bbl (1.7%) build to refined product inventories (gasoline plus distillate plus jet fuel) last week, the largest increase since Jan. 4. As a result of the rising inventories and falling margins, refiners reduced their utilization rate to 87.1% last week, well below the year-ago level of 91.7%. Thus, production should fall in the coming weeks."

Jakob said, "Refinery runs are at the lowest levels since 1997, and refiners should not be hard pressed to build stocks when final demand remains low and lawmakers are trying to force a Strategic Petroleum Reserves release of light crude oil."

Paul Horsnell, Barclays Capital Inc., London, said, "US data continue to imply that July has been a weak month for gasoline demand, while the overall level of US oil demand has been relatively robust. The softness in the weekly data is again concentrated in oil product inventory gains."

Compared with an all-time record high demand in July 2007, Horsnell said, "Gasoline demand is noticeably weaker in year-over-year terms than it has been in any month this year." Despite talk of demand destruction, he said, "When the fall already released in wholesale prices is passed through to retail prices, and with the rate of increase tailing off, we would expect US gasoline demand to recover somewhat from the relatively gentle 1.4% decline seen for 2008 to date."

Energy prices
The new front-month September contract for benchmark US sweet, light crudes fell $3.98 to $124.12/bbl July 23 on the New York Mercantile Exchange. The October contract lost $3.93 to $125.04/bbl. On the US spot market, WTI at Cushing, Okla., was down $4.26 to $123.69/bbl. Heating oil for August delivery dropped 12.81¢ to $3.55/gal on NYMEX. The August contract for reformulated blend stock for oxygenate blending (RBOB) declined 11.26¢ to $3.03/gal.

The August natural gas contract dropped 27.9¢ to $9.79/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 18¢ to $9.95/MMbtu. EIA reported the injection of 84 bcf of natural gas into US underground storage during the week ended July 18. Working gas in storage is now at 2.4 tcf, down 347 bcf from a year ago at this time and 22 bcf below the 5-year average.

In London, the September IPE contract for North Sea Brent crude lost $4.26 to $125.29/bbl. The August gas oil contract dropped $20.25 to $1,170.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes fell $3.54 to $123.89/bbl on July 23.

Contact Sam Fletcher at [email protected].