MARKET WATCH: Weakening economy brings down oil prices

Sam Fletcher
OGJ Senior Writer

HOUSTON, Aug. 12 -- Prices for oil and petroleum products accelerated their decline Aug. 11 in the New York market on reports from both China and Japan indicating continued weakness in the global economy.

“Disappointing industrial output and retail sales suggest that Chinese growth may be cooling; meanwhile, data on wholesale prices and machinery orders in Japan came in weaker than expected,” said analysts in the Houston office of Raymond James & Associates Inc.

“Crude fell 2.8% after a 1.6 million bbl build in total petroleum inventories kept inventories near record highs, and the International Energy Agency (IEA) warned about tepid economic growth in the US and China, the world's two biggest energy consumers,” said Raymond James analysts. However, the front-month natural gas contract rose 0.6%.

Mortgage rates sank this week to the lowest level in decades after the Federal Reserve System’s earlier bearish announcement it will use proceeds from debt and mortgage-backed securities purchased from Fannie Mae and Freddie Mac to buy Treasuries to aid recovery. The combination of economic factors weighed heavily on the broad equity market, dropping the Dow Jones Industrial Average by 2.5% and the Standard & Poor’s 500 index down 2.8% in a heavy hit.

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “The Fed is acknowledging the poor economic macro data that has been coming over the last few weeks and that sent the stock market off the cliff (although the poor macro-economic data has been with us already for a few weeks).” He reiterated, “What counts for oil demand is jobs and consumer confidence; and both have been lacking in recent weeks.”

IEA revised world oil demand higher by 50,000 b/d, “but supply has been revised higher by about 100,000 b/d and that translates in a slightly lower call on the Organization of Petroleum Exporting countries for 2011,” Jakob noted. “The IEA call-on-OPEC for 2011 is at 29.1 million b/d and that compares with OPEC production at 29.2 million b/d in July. Hence on a global basis if OPEC continues to produce at current levels, there will be no stock reduction in 2011 and that will continue to make it difficult for crude to trade above $85/bbl and out of a contango,” he said. “The global oil balances need lower OPEC oil production, not higher production, and that will only come through lower oil prices.”

The Energy Information Administration (EIA) reported Aug. 12 the injection of 37 bcf of natural gas into US underground storage in the week ended Aug. 6, slightly above the Wall Street consensus for injection of 35 bcf. That brought working gas in storage to 2.985 tcf, down 158 bcf from a year ago but 219 bcf above the 5-year average.

EIA earlier reported commercial US crude inventories fell 3 million bbl to 355 million bbl in the week ended Aug. 6, exceeding the Wall Street consensus for a 2 million bbl drop. Gasoline stocks increased by 400,000 bbl to 223.4 million bbl, surpassing the market’s outlook for a 300,000 bbl gain. Distillate fuel inventories climbed 3.5 million bbl to 173.1 million bbl, nearly twice Wall Street’s expectation of a 1.8 million bbl gain (OGJ Online, Aug. 11, 2010).

Energy prices
The September contract for benchmark US sweet, light crudes fell $2.23 to $78.02/bbl Aug. 11 on the New York Mercantile Exchange. The October contract dropped $2.22 to $78.49/bbl. Heating oil for September delivery declined 5.02¢ to $2.08/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month lost 8.77¢ to $2/gal.

The September contract for natural gas rebounded by 2.9¢ to $4.33/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., continued its decline, down 4.5¢ to $4.39/MMbtu.

In London, the September IPE contract for North Sea Brent declined $1.96 to $77.64/bbl. Gas oil for August dropped $17.50 to $652/tonne.

The average price for OPEC’s basket of 12 benchmark crudes lost $1.47 to $75.40/bbl.

Contact Sam Fletcher at [email protected].