Crude drops again - can it fall more ?

Prices give up almost $11 in two sessions

Crude oil prices once again witnessed a drop in prices for the second consecutive day today, Wednesday, 16 July, 2008. Prices plunged once again after government data showed a surprise increase in U.S. petroleum inventories last week. Yesterday, the Organization of the Petroleum Exporting Countries lowered its forecast for world oil-demand growth for 2008 and 2009. Prices witnessed considerable volatility throughout the day.

Crude-oil futures for light sweet crude for August delivery today closed at $134.6/barrel (lower by $4.14/barrel or 3%) on the New York Mercantile Exchange. Earlier in the day it fell to $132. Last week, prices gained $0.21 (0.2%). Crude has lost $10.58 over the last two sessions, the biggest two-day price drop since January, 1991. It's now 8.6% lower than the $147.27 record high hit last Thursday.

Crude prices gained 38% in the second quarter of this year. It was the biggest quarterly increase in nine years. It ended June 2008 higher by 9.9%. Prices are 82% higher than a year ago. For the year, crude is up by 42% till date.

EIA reported today that U.S. crude inventories rose 3 million barrels to stand at 296.9 million barrels in the week ended 11 July. Gains in U.S. crude inventories got a helping hand from increased imports. Daily crude imports averaged nearly 10.8 million barrels last week, up 1.2 million barrels from a week earlier. With the weekly gain of 3 million barrels, U.S. crude inventories were still near the lower boundary of the average range for this time of year.

EIA also reported that gasoline supplies rose by 2.4 million barrels, and distillate stocks gained by 3.2 million barrels. Over the last four weeks, U.S. motor gasoline demand averaged 9.3 million barrels per day, down by 2.1% from the same period last year. U.S. refineries operated at 89.5% of their operable capacity last week, up from the previous week's 89.2%.

In its monthly report issues yesterday, OPEC lowered its forecast for world oil-demand growth for 2008 to 1.03 million barrels a day, which represents a decline of 70,000 barrels from its previous estimate. Global oil demand this year is expected to average 86.81 million barrels a day. Earlier this month, the Energy Information Administration projected that U.S. petroleum consumption will shrink by 400,000 barrels a day in 2008, 38% more than EIA's June projection of a decline of 290,000 barrels.

Crude oil also fell because of the dollar's rise against the euro today. At the currency markets on Wednesday, the dollar reversed sharp losses taking support from better-than-expected U.S. output data, strength on Wall Street and sagging crude-oil futures. The dollar index which tracks the performance of the greenback against a basket of other currencies, rose 0.3% to 71.98.

Against this backdrop, August reformulated gasoline fell 3.1% to $3.279 a gallon and August heating oil lost 2% to $3.841 a gallon.

Natural gas futures fell to the lowest in eight weeks amid concern demand will decline as the U.S. economy slows. August natural-gas futures fell 0.7% to $11.398 per million British thermal units, a day ahead of the government's update on gas in storage.

At the MCX, crude oil for July delivery closed at Rs 5,989/barrel, higher by Rs 25 (0.41%) against previous day's close. Natural gas for July delivery closed at Rs 488.6/mmbtu, lower by Rs 5.1/mmbtu (1%).