MARKET WATCH: Recession fears pull down energy prices

Energy prices fell July 7 for the fifth consecutive session among fears that pending second-quarter earnings reports will confirm the recession has not yet ended.

Jul 8th, 2009

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 8 -- Energy prices fell July 7 for the fifth consecutive session among fears that pending second-quarter earnings reports will confirm the recession has not yet ended.

“The drop in crude came despite the [US] Energy Information Administration raising its 2009 world oil demand forecast from 83.68 million b/d to 83.85 million b/d,” said analysts at Pritchard Capital Partners LLC, New Orleans.

Crude prices continued to fall in early trading July 8 as the Organization of Petroleum Exporting Countries reduced its demand outlook. “Additionally, the Commodities Futures Trading Commission (CFTC) noted that it would take control of position limits on energy futures to reduce excessive commodity speculation. Finally, on a longer-term note, following China and India's opposition, major world nations have decided to drop a G8 [association of eight nations of the northern hemisphere: Canada, France, Germany, Italy, Japan, Russia, the UK, and the US, plus a representation from the European Union] draft to reduce greenhouse gas emissions in half by 2050,” said analysts in the Houston office of Raymond James & Associates Inc. Natural gas prices also were lower in early trading.

CFTC’s proposed move against speculation in the crude market is totally opposite its findings a year ago that speculators were not the cause of much higher oil prices at that time. But that was before the Obama administration appointed a new head of the commission. Opponents fear that having political appointees decide who is using the market for legitimate hedging and who is speculating will both take liquidity out of the market and increase volatility. As for price manipulation, laws are already in place to police that, opponents said.

The downward slide of crude prices “is now becoming a very regular daily pattern that is starting to have the marks of organized liquidation,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The CFTC has declared that it has the desire of imposing fixed limits also in the energy markets, and even if we are still months away from that (due to the procedural time for such a move), there might be some interest from some participants to either already have a cleaner book or to reduce the long exposure in front of this future liquidation risk.”

On the supply side, Jakob said, “Nigerian militants continue to attack crude oil installations day after day. The overnight claim is for an attack on an Agip pipe to the Brass terminal and another attack on a Shell pipeline, while the Russian ambassador to Nigeria confirms that six sailors on the Sichem Peace petrochemical carrier were taken hostage by militants.”

In other news, he said, “The dollar index continues to trade in a relative narrow range and crude oil is distancing itself from trading the dollar correlation. It is however keeping a closer relation to the developments on the equities.”

Natural gas traded flat during most of the July 7 session “until the United States Natural Gas Fund (UNG) announced that it would suspend creation of new shares,” Pritchard Capital Partners said, adding, “In effect, it appears that UNG has now become a closed-end fund, and provided sufficient borrow remains available, it should trade more or less in-line with the NYMEX contract; however, fixing the number of shares could make UNG more prone to manipulation.”

They added, “The [equity market] performance of the IntercontinentalExchange Inc. and the CME Group Inc. implies investors are expecting commodity trading volumes to fall. A new EIA short-term energy outlook…forecasts that natural gas wellhead price will average $3.75/Mcf this year and $5.12/Mcf next. The forecast assumes production decline of just 400 MMcfd in the US year-over-year and demand will decline 1.4 bcfd.” That compares with a NYMEX consensus of $4.35/MMbtu this year and $6.50/Mcf for next year. “Wellhead and NYMEX are typically within 40¢/Mcf of one another (NYMEX typically higher),” said Pritchard Capital analysts.

US inventories
EIA said July 8 commercial US crude inventories fell 2.9 million bbl to 347.3 million bbl in the week ended July 3. That was in sharp contrast to the American Petroleum Institute’s earlier bearish report of a 2.8 million bbl increase but slightly exceeded Wall Street analysts’ consensus of a 2.8 million bbl drop.

Closely watched gasoline stocks increased 1.9 million bbl to 213.1 million bbl on the eve of the US Fourth of July holiday, which historically marks the peak of the summer driving season. Both finished gasoline inventories and gasoline blending components were up, outstripping Wall Street’s consensus of a moderate increase of 900,000 bbl. Distillate fuel inventories jumped 3.7 million bbl to 158.7 bbl, above average for this time of year and far exceeding analysts’ expectations of a 1.8 million bbl build.

Imports of crude into the US fell 139,000 b/d to 9.2 million b/d. Over the 4 weeks through July 3, US oil imports were down an average 775,000 b/d to 9.2 million b/d. Total gasoline imports averaged 1.2 million b/d in the latest week. Distillate fuel imports averaged 221,000 b/d.

However, the input of crude into US refineries was relatively unchanged last week at 15 million b/d, with units operating at 86.8% of capacity. Gasoline production rose slightly to 9.3 million b/d, while distillate fuel production declined to 4 million b/d.

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, noted refined product inventories (gasoline, distillate, and jet fuel) increased 6.5 million bbl (1.6%), “due primarily to very weak demand.” He said, “Gasoline consumption was 1.3% below year-ago levels, while distillate demand of 3.04 million b/d was the lowest weekly total since July 2003.”

He said the East Coast was the only area where gasoline inventories declined last week. However, Rousseau said, “Distillate inventories continued to rise and are now almost 50% above the 5-year average for this calendar week. The West Coast also had positive and negative data; both gasoline and distillate inventories are 3% below the 5-year average, but refinery utilization rates increased to the highest level since February.”

Energy prices
The August contract for benchmark US light, sweet crudes dropped $1.12 to $62.93/bbl July 7 on the New York Mercantile Exchange. The September contract decreased $1.11 to $63.82/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.12 to $62.93/bbl. Heating oil for August delivery dropped 2.59¢ to $1.60/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month dipped by 0.76¢ to $1.73/gal.

The August natural gas contract fell 5.8¢ to $3.43/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 3¢ to $3.31/MMbtu.

In London, the August IPE contract for North Sea Brent crude declined 82¢ to $63.23/bbl. The July gas oil contract dropped $12.50 to $504.75/tonne.

The average price for OPEC’s basket of 12 reference crudes lost 69¢ to $62.97/bbl on July 7.

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