MARKET WATCH: Energy prices slip in profit taking

Crude futures prices pulled back from a record $90/bbl high during profit taking Oct. 19, but many analysts expect prices to resume climbing.

Sam Fletcher
Senior Writer

HOUSTON, Oct. 22 -- Crude futures prices pulled back from a record $90/bbl high during profit taking Oct. 19, but many analysts expect prices to resume climbing, driven by a weak dollar, speculative investing, and low supplies at Cushing, Okla., the delivery point for oil sold on the New York Mercantile Exchange.

"The US dollar touched a new low against the euro and the yen, while Turkey's parliament approved a measure authorizing military action against separatist rebels in Iraq," said Robert S. Morris, Banc of America Securities LLC, New York. "However, a larger-than-expected build was reported in US crude, distillate, and gasoline inventories, which the market seemed to shrug off."

The market also seemed to ignore comments by Federal Reserve Chairman Ben Bernanke that the troubled housing market likely will be a "significant drag" on US economic growth through early next year. A larger-than-expected jump in jobless claims the prior week prompted speculation that the labor market may be weakening due to the sharp downturn in the housing market and associated credit crisis.

Meanwhile, large speculative funds last week increased their net futures length on NYMEX crude futures "at double the pace of the previous 2 weeks," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "While there were some fresh long positions initiated by the large speculative funds, most of the increase in the net position has been coming from short covering, which has been responsible for two thirds of the net length increase. The short positions held by the large speculative funds remain large…leaving more room for short covering dynamics," Jakob said.

The growth of option trading marked a "structural change" in crude futures market dynamics in 2007, "where open interest has doubled from a year ago," he said. This in turn has created a set of hedging dynamics that were not present in previous years and at certain times can be one of the key drivers of price, said Jakob.

Energy prices
The November contract for benchmark US light, sweet crudes hit a record high of $90.07/bbl in intraday trading Oct. 19 on NYMEX before closing at $88.60/bbl, down 87¢ for the day (OGJ Online, Oct. 19, 2007). The December contract fell $1.09 to $86.95/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down 87¢ to $88.61/bbl. Heating oil for November delivery dropped 1.87¢ to $2.33/gal on NYMEX. The November contract for reformulated blend stock for oxygenate blending lost 1.64¢ to $2.17/gal.

The November natural gas contract fell 33.3¢ to $7.04/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 31¢ to $6.89/MMbtu. "Composite spot natural gas prices also posted a strong increase last week with above-normal temperatures earlier in the week across the south and in the Rockies, and on a revised forecast calling for cooler-than-normal temperatures across the middle portions of the country this week," Morris reported. "Also, a lower-than-expected natural gas injection figure was reported for the prior week. However, the near-month NYMEX futures contract ended the week down sharply on forecasts calling for a warmer-than-normal winter."

In London, the December IPE contract for North Sea Brent crude dropped 81¢ to $83.79/bbl. Gas oil for November dipped 50¢ to $731/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 benchmark crudes gained 41¢ to $81.55/bbl on Oct. 19. So far this year, OPEC's basket price has averaged $64.72/bbl vs. $61.08/bbl for all of 2006.

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