MARKET WATCH: Economy worries trigger 5% fall in crude price

Less than a week after hitting record-high intraday and closing prices in the New York futures market, the September crude contract fell 5% Aug. 6, back to price levels of early July.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 7 -- Less than a week after hitting record-high intraday and closing prices in the New York futures market, the September crude contract fell 5% Aug. 6, back to price levels of early July.

Crude prices spiked above $78/bbl July 31 partly in response to the Conference Board Inc.'s latest Consumer Confidence Index that indicated US business conditions and the job market rebounded in July to the highest reading since August 2001. But crude prices fell heavily Aug. 3, resulting in a 2% loss for that week based on other reports of weaker-than-expected job growth in the US and slower growth in the service sector. That was followed by an even bigger fall, closing just above $72/bbl Aug. 6, as large speculative funds moved to lock in profits from the earlier price rally they helped create.

Speculative net long positions [crude futures contracts bought in expectation of higher prices] soared to record highs in recent weeks. "From June 26 to July 31, the large speculative funds have added 67,000 fresh longs that have now gone into losses or break-even at best," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland.

Reports of increased oil production also affected the market. "Iraq's crude oil output rose 310,000 bbl to average 2.24 million b/d last month, the highest since October 2004, and Nigerian production increased to average 2.2 million b/d last month, the highest since February," said analysts in the Houston office of Raymond James & Associates Inc. Despite increased production from some members of the Organization of Petroleum Exporting Countries, Raymond James analysts said, "We remain bullish on crude, as [commercial US] stockpiles dropped 6.5 million bbl last week, the largest decline this year. Of note, supplies at Cushing, Okla., are at their lowest levels since 2005."

Energy prices
The September contract for benchmark US sweet, light crudes traded as low as $71.60/bbl before closing at $72.06/bbl, down $3.42 for the day on the New York Mercantile Exchange. The October contract dropped $3.40 to $71.97/bbl. Subsequent contracts were in backwardation, with prices declining progressively month after month through August 2008. On the US spot market, West Texas Intermediate at Cushing was down $3.42 to $72.07/bbl. Heating oil for September delivery fell 9.47¢ to $1.94/gal on NYMEX. The September contract for reformulated blend stock for oxygenate blending (RBOB) dropped 10.31¢ to $1.93/gal.

However, the September natural gas contract gained 11.8¢ to $6.21/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 1.5¢ to $6.09/MMbtu. Natural gas prices were up moderately in early trading Aug. 7 on NYMEX "on news of a shut-in pipeline in Louisiana and a possible storm developing in the Gulf of Mexico," Raymond James analysts reported. "Additionally, a heat wave is expected across most of the US this week, boosting energy demand," they said.

In London, the September IPE contract for North Sea Brent crude lost $3.58 to $71.17/bbl. Gas oil for August dropped $18 to $622.75/tonne.

The average price for OPEC's basket of 11 reference crudes lost $1.77 to $70.24/bbl on Aug. 6.

Contact Sam Fletcher at samf@ogjonline.com.

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