MARKET WATCH: Energy prices continue to fall

Sam Fletcher
OGJ Senior Writer

HOUSTON, July 9 -- Energy prices continued to tumble July 8, with front-month crude down to nearly $60/bbl on the New York market after the Energy Information Administration reported bigger-than-expected increases in US inventories of petroleum products.

EIA said US gasoline stocks increased 1.9 million bbl to 213.1 million bbl in the week ended July 3, just prior to the US Fourth of July holiday that historically marks the peak of the summer driving season. Distillate fuel inventories jumped 3.7 million bbl to 158.7 bbl. Crude inventories fell 2.9 million bbl to 347.3 million bbl (OGJ Online, July 8, 2009).

“Larger gasoline and distillate builds continued to weigh on crude as oil that was stored from the contango trade continues to work its way through the system. The problem is demand for refined products remains low for this time of year,” said analysts at Pritchard Capital Partners LLC, New Orleans.

EIA data implied gasoline demand was 9.4 million b/d during the week, compared with demand of 9.6 million b/d for the same period in 2008 and 9.8 million in 2007, they said. Still, Pritchard Capital Partners said, “Gasoline demand remains resilient despite the recent price increases. We expect gasoline inventories to fall [in next week’s report] based on declines in refinery runs as refiners seek to deal with oversupplies of most finished products (total products inventories up 14% vs. a year ago).” Implied distillate demand at 3.7 million bbl “has not been this low since December 2003,” they said. “Both implied demand figures confirm that the economic recovery remains fragile.”

Pritchard Capital analysts added, “Threats of increased regulation of commodities speculators by the Commodities Futures Trading Commission (CFTC) could be forcing speculators to exit commodity positions and reassess trading strategies. The equity price of IntercontinentalExchange Inc. has fallen 23% in 2 days.”

CFTC said July 8 it would take control of position limits on energy futures to reduce excessive commodity speculation (OGJ Online, July 8, 2009).

In Houston, analysts with Raymond James & Associates Inc. said, “Although we still like the long-term fundamentals for crude, they are not strong at the moment, and oil could go either way from here. The same cannot be said for natural gas prices, which should be moving lower as the domestic market heads for full storage in the coming months.”

Meanwhile, The US Department of Labor said July 9 initial claims for jobless benefits fell last week to the lowest level since early January. New claims were down 52,000 to a seasonally adjusted total of 565,000 during the week shortened by the Fourth of July holiday. Also, the usual July layoffs among the major auto companies occurred instead when General Motors Corp. and Chrysler LLC restructured earlier this year. Nevertheless, government officials said it was the first time new claims dropped 600,000/week since late January.

However, continuing claims jumped up 159,000 to 6.88 million, the highest on records dating from 1967.

After recent visits with management teams of 10 exploration and production companies, analysts at Friedman, Billings, Ramsey & Co. Inc. (FBR) in Arlington, Va., raised commodity price predictions for the second quarter to $59.70/bbl for oil, up from $45/bbl previously, and to $3.71/Mcf for gas, up from $3.25/Mcf. They lowered their third-quarter estimate for gas to $3.25/Mcf from $3.75/Mcf due to the oversupply risk exiting injection season. Analysts raised their oil price estimates to $60/bbl for the third quarter and $65/bbl for the fourth, from previous predictions of $50/bbl for both.

Energy prices
The August contract for benchmark US sweet, light crudes dropped $2.79 to $60.14/bbl July 8 on the New York Mercantile Exchange. The September contract lost $2.70 to $61.16/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $2.79 to $60.14/bbl. Heating oil for August declined 6.28¢ to $1.54/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month fell 9.95¢ to $1.63/gal.

The August natural gas contract dropped 7.6¢ to $3.35/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 5.5¢ to $3.26/MMbtu. The EIA reported the injection of 75 bcf of natural gas into US underground storage in the week ended July 3. That increased the amount of working gas in storage to 2.796 tcf. That’s up 601 bcf from year-ago levels and 452 bcf above the 5-year average.

It was the third consecutive gas storage report by the EIA of lower than expected injections and “possibly the first evidence of a supply response from the rig count reductions and [gas well] shut-ins,” said Pritchard Capital Partners. “Natural gas is extremely oversold on a relative strength index (RSI ) basis and has tended to bounce from these levels; therefore, a lower storage injection could be taken positively by the market.”

In London, the August IPE contract for North Sea Brent crude was down $2.80 to $60.43/bbl. Gas oil for July lost $16.25 to $488.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes dropped $1.86 to $61.11/bbl on July 8.

Contact Sam Fletcher at samf@ogjonline.com.