Crude prices continue to tumble

Prices drop again as hurricane worries fade and crude inventories fall less than expected

The weekly inventory report by the Energy Department and the rebounding dollar pressured crude prices for the second consecutive day today, Wednesday, 23 July, 2008. Prices also fell after concerns faded that Hurricane Dolly would pose much of a threat to energy infrastructure in the Gulf of Mexico.

Crude-oil futures for light sweet crude for September delivery closed at $124.44/barrel (lower by $3.98/barrel or 3.1%) on the New York Mercantile Exchange. Prices gave up more than $7 in the past two sessions. Last week, prices coughed up $16.5 (11.2%). It's now 16% lower than the $147.27 record high hit last on Thursday, 10 July, 2008.

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 66% higher than a year ago. For the year, crude is up by 33.3% till date.

EIA reported in its weekly inventory report today that U.S. crude inventories fell less than expected last week and fell 1.6 million in the week ended 18 July. Market expected a figure around 2 million. At 295.3 million barrels, U.S. crude-oil inventories are in the lower half of the average range for this time of year.

As per the report, U.S. crude-oil imports averaged 9.8 million barrels per day last week, down 985,000 barrels per day from the previous week. U.S. refineries operated at 87.1% of their operable capacity last week. The EIA also reported U.S. gasoline supplies rose by 2.9 million barrels in the latest week, and distillate stocks gained by 2.4 million barrels.

EIA data also showed that an economic slowdown is taking toll on energy demand. Over the past four weeks, U.S. motor gasoline demand has averaged 9.3 million barrels per day, down by 2.4% from the same period last year.

At the currency markets on Wednesday, the dollar index, a measure of the greenback against a trade-weighted basket of currencies, gained 0.4% to 72.74. The dollar was boosted by Philadelphia Federal Reserve Bank President Charles Plosser's comments that accommodative monetary policy needs to be reversed and that rate hikes will need to begin soon. Separately, Treasury Secretary Henry Paulson reaffirmed U.S. support for a strong dollar in a speech yesterday.

In its monthly report issued last week, 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.

Brent crude oil for September settlement dropped $4.26 (3.3%) to close at $125.29 a barrel on London's ICE Futures Europe exchange. The London benchmark rose 54% in FY 2007, the most since 1999 when prices more than doubled.

Against this background, September reformulated gasoline fell 11.55 cents to $3.05 a gallon and September heating oil sank 12.53 cents to $3.58 a gallon.

Natural gas in New York declined as crude oil fell after fuel inventories rose and a stronger U.S. dollar reduced the appeal of commodities as a hedge against inflation. Natural gas for August delivery fell 27.9 cents (2.8%) to settle at $9.788 per million British thermal units.

At the MCX, crude oil for August delivery closed at Rs 5,342/barrel, lower by Rs 100 (1.8%) against previous day’s close. Natural gas for August delivery closed at Rs 428/mmbtu, lower by Rs 2.7/mmbtu (0.62%)