MARKET WATCH: Energy prices mixed as subprime crisis defuses

Energy prices were mixed Aug. 10 amid market worries that US subprime mortgage problems would undermine energy demand.

Sam Fletcher
Senior Writer

HOUSTON, Aug. 13 -- Energy prices were mixed Aug. 10 amid market worries that US subprime mortgage problems would undermine energy demand.

"As a result, the Paris-based International Energy Agency last week trimmed its fourth-quarter forecast for US crude demand…even though its full-year global forecasts for 2007 and 2008 were essentially unchanged," said Robert S. Morris, Banc of America Securities LLC. "In the mean time, the US Federal Reserve left its short-term interest rate target unchanged at 5.25% even though it acknowledged that risks to growth have increased 'somewhat.'"

On Aug. 13, analysts in the Houston office of Raymond James & Associates Inc. reported, "Markets are expected to rebound today, as US stock futures are already off to a better start following moves from central banks worldwide pumping over $323 billion into the money markets to restore confidence regarding a liquidity crisis."

They said, "Premarket, crude is trading up this morning as foreign markets bounced back from the hits they took following the US subprime mortgage debacle. This restored confidence regarding the liquidity crisis and a strong demand forecast from the Energy Information Administration, which expects oil demand to grow faster in 2008 than it has this year, have contributed to crude's spike. Other factors include geopolitical tensions and continued fighting in Nigeria, which has shut down at least a fifth of output, and the fact that China's crude imports for July are 39% higher than last year."

Meanwhile, Raymond James analysts claim escalating oil sands costs in Canada support an oil price floor near $60/bbl for West Texas Intermediate. "Of course, this does not guarantee that oil can never again trade below $55/bbl, but over a sustained timeframe, we think downside is limited to $55-60/bbl range—as indeed could be seen in late 2006, during the last major correction in oil prices," analysts said. "More broadly, rising finding and development and operating costs can be seen not just in Canada, but also in many other key producing regions, including the Gulf of Mexico, North Sea, West Africa, and Russia. This pattern is indicative of the structural imbalance between global oil supply and demand that, as we have long argued, should lead to a trend of higher highs and higher lows in the oil market," analysts said.

Energy prices
The September contract for benchmark US light, sweet crudes dropped 12¢ to $71.47/bbl Aug. 10 on the New York Mercantile Exchange. The October contract fell 15¢ to $71.25/bbl. On the US spot market, West Texas Intermediate was down 13¢ to $71.47/bl. Heating oil for September delivery dropped 1.8¢ to $1.97/gal on NYMEX. However, the September contract for reformulated blend stock for oxygenate blending (RBOB) climbed by 2.08¢ to $1.95/gal.

The September natural gas contract jumped up 23.4¢ to $6.82/MMbtu Aug. 10 on NYMEX. On the US spot market, gas at Henry Hub, La., increased by 11¢ to $6.63/MMbtu. "Natural gas has rebounded sharply over the past 2 weeks as a heat wave engulfed much of the country and as the traditionally most active 2 months [August and September] of the Atlantic Basin storm season kicked off. Last week's lower-than-expected natural gas storage figure also boosted momentum for natural gas prices," said Morris.

Raymond James analysts said, "Natural gas is also trading higher premarket as computer models have shown a tropical depression off the coast of Africa, which could potentially become a Gulf of Mexico hurricane. However, with only a month left in the summer cooling season, fundamentally there is little support for gas prices to continue increasing until the winter heating season draws from inventories."

In London, the September IPE contract for North Sea Brent crude gained 18¢ to $70.39/bbl. The August contract for gas oil was unchanged at $619.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 11 reference crudes fell 74¢ to $67.52/bbl on Aug. 10. So far this year, OPEC's basket price has averaged $61.90/bbl, compared with an average price of $61.08/bbl for all of 2006.

Contact Sam Fletcher at samf@ogjonline.com.

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