Oil Prices Headed Lower?

Oil prices may finally be getting acquainted with reality. After clipping an eight-month high earlier today, crude prices tumbled more than 2% to close below $70 a barrel.

Given the shaky consumer-confidence reading this morning, primarily attributed to higher gasoline prices, a drop in oil prices would be welcome. And it may be in the offing following a 41% gain in prices during the second quarter.

The oil market has not exactly focused on fundamental supply and demand issues during the past couple of years. The price spike to $147 a barrel one year ago looks bizarre in retrospect. The lows of $35 a barrel earlier this year reflected the post-Lehman uber-pessimism.

More recently, the surge in oil prices — up 68% in the last five months — has similarly ignored reality. Oil supplies are rising, global demand is down and inflation fears remain highly theoretical.

Oil bulls have focused on two notions: a weaker dollar and rising demand from China. When the dollar declines, commodity prices tend to rise since they are priced in dollars. Need more of the weak buck to buy the same amount of crude, all things being equal. There is something to this idea, because the dollar has struggled and many expect it to have a rough go amid soaring fiscal deficits.

The China demand notion, however, is far weaker. Even if China demand is rising, the wilting economies of Europe, Japan and the U.S. more than compensate for that demand. Given the still uncertain prospects for these large economies, it’s hard to see how demand will drive oil prices higher.

Intriguingly, Chevron and ExxonMobil started retreating from recent highs earlier in June even as oil prices pressed higher. Maybe those stock moves foreshadowed coming weakness in the oil market. We could see a broader retreat in oil prices, especially if the Green Shoots don’t start blossoming into something more than a hope.

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Oil Tumbles From 8-Month High as Consumer Confidence Slumps

Crude oil tumbled from an eight- month high and gasoline fell as U.S. consumer confidence declined in June, indicating lower fuel demand.

Oil dropped 2.2 percent after the Conference Board’s sentiment index unexpectedly weakened and delinquencies on the least risky U.S. mortgages more than doubled. The U.K. economy shrank the most since 1958, a government report showed. Oil also retreated on forecasts that U.S. fuel supplies rose last week.

“The consumer confidence number is raining on the bulls’ parade,” said Phil Flynn, senior trader at Alaron Trading Corp. in Chicago. “We were moving higher earlier today but concerns about the economy are now pulling the market lower.”

Crude oil for August delivery fell $1.60 to settle at $69.89 a barrel at 2:53 p.m. on the New York Mercantile Exchange. Prices are up 57 percent this year. Futures touched $73.38 a barrel earlier today, the highest since Oct. 21, as militant attacks curbed supply from Africa’s largest producer.

Prices pared losses in electronic trading after the American Petroleum Institute reported that U.S. crude-oil supplies dropped 6.82 million barrels to 349.7 million last week, the biggest decline since September. Futures were down 92 cents, or 1.3 percent, at $70.57 a barrel at 4:46 p.m.

Oil in New York posted a 41 percent quarterly gain, the biggest since 1990. Prices have rallied as rebounding world equity markets and a weaker dollar encouraged investors to buy the commodity as an alternative investment.

‘Significant Volatility’

“I’m expecting significant volatility this week as fund managers position themselves for the end of the quarter and because it’s a short trading week,” said Stephen Schork, president of the Schork Group Inc. of Villanova, Pennsylvania. “I don’t think this is the death-knell of the market.”

There will be no floor trading in New York on July 3 because of the Independence Day holiday.

“Once we come back from the holiday on Monday, it will be a whole new game,” Schork said. “Price is high and demand is low. Attention may shift to the fundamentals.”

Gasoline for July delivery declined 3.86 cents, or 2 percent, to end the session at $1.8972 a gallon in New York. The July contract expired today. The more-active August contract declined 3.34 cents, or 1.7 percent, to settle at $1.902.

The Conference Board’s consumer sentiment index fell to 49.3 from a revised 54.8 in May, the New York-based research group said. Prime mortgages 60 days or more past due climbed to 2.9 percent of such loans through March 31 from 1.1 percent at the same point in 2008, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said today.

U.K. Economy

Gross domestic product in the U.K. decreased 2.4 percent in the first quarter from the final three months of 2008, the Office for National Statistics said today in London. The economy was forecast to slip 2.1 percent, according to the median of 28 economists surveyed by Bloomberg News.

“Oil moved above $73 overnight, but then had to face some sobering headlines,” said John Kilduff, senior vice president of energy at MF Global in New York. “The U.K. GDP numbers were quite dour, which took the momentum right out of the market.”

An Energy Department report tomorrow will probably show that U.S. fuel inventories rose last week. Gasoline supplies climbed 2 million barrels, according to the median of 15 estimates in a Bloomberg News survey. Stockpiles of distillate fuel, a category that includes heating oil and diesel, increased 1.5 million barrels.

Crude-oil supplies declined 2 million barrels, according to the survey. The Energy Department is scheduled to release its weekly report on July 1 at 10:30 a.m. in Washington. The industry-funded API released its weekly supply data at 4:40 p.m. today, 10 minutes later than usual.

Possible Outcomes

“Just about any possible outcome tomorrow will be bearish,” said Peter Beutel, president of Cameron Hanover Inc., an energy consulting company in New Canaan, Connecticut. “We are expecting the fuel stocks to increase and there will be plenty of crude oil available even if there is a drop.”

Total U.S. daily fuel demand in the four weeks ended June 19 was down 6.6 percent from a year earlier, the Energy Department said last week.

The International Energy Agency, an adviser to 28 developed nations, yesterday lowered its five-year forecast for global crude demand because of the economic slump. The Paris-based agency cut its oil-consumption estimates for every year through 2013 by about 3 million barrels a day.

Declining crude oil and gasoline prices helped send the Reuters/Jefferies CRB Index of 19 raw materials lower. The index dropped 1.7 percent to 249.96. The measure is up 13 percent for the quarter.

Brent Oil

Brent crude oil for August settlement fell $1.69, or 2.4 percent, to end the session at $69.30 a barrel on London’s ICE Futures Europe exchange.

Crude oil volume in electronic trading on the Nymex was 456,723 contracts as of 3:06 p.m. in New York. Volume totaled 371,435 contracts yesterday, 25 percent less than the average over the past three months. Open interest was 1.15 million contracts. The exchange has a one-business-day delay in reporting open interest and full volume data.

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Iraq awards BP-led consortium a contract to develop oil field

Reporting from Baghdad -- A much ballyhooed effort by Iraq to lure foreign investment and expertise to help its battered oil industry fizzled Tuesday after it became clear that the government is not prepared to pay the prices international oil companies are asking for their services.

Iraq was seeking bids for the development of eight of its existing oil and gas fields, but only one contract to work one oil field was awarded at a public auction televised live from Baghdad's Rashid Hotel in the heavily fortified Green Zone.

The disappointing outcome to the widely anticipated event, which was planned a year ago, suggested that international oil firms aren't as eager to invest in Iraq as the government had hoped and that there will be no quick fix for the nation's looming financial problems.

"It's pretty much a total disaster," said Peter Kemp of the New York-based Energy Intelligence publishing group. "It seems the Iraqis totally miscalculated the commercial realities of this process."

The sole contract was awarded to a consortium led by Britain's BP and including China's CNPC International Ltd., marking the first time foreign companies have been permitted to invest in Iraqi oil since 1972, when the country's oil industry was nationalized. Iraqi Oil Minister Hussein Shahristani called it a "historic day" that coincided with the withdrawal of U.S. troops from Iraq's cities.

The auction drew dozens of executives from the world's top oil firms and was being closely watched for signs of how the new Iraq is likely to go about developing its vast proven oil reserves, the third-largest in the Middle East after Saudi Arabia and Iran.

But as the bids were unsealed, it quickly became clear that there was a wide gulf between the maximum price the Iraqi government was prepared to pay investors to develop the oil fields and the minimum price oil companies were prepared to accept.

A Chinese consortium sought 10 times the price offered by the Iraqi government to develop the Maysan field in southern Iraq, and a consortium led by U.S. oil giant ConocoPhillips sought five times more than the Iraqi offer to develop the Bai Hassan field in the north.

Under such contracts, oil companies would be paid a fixed fee per unit of oil or gas produced, above a certain threshold, in return for much-needed technical expertise and investment in infrastructure to increase production.

Four of the eight fields on offer received only one bid each, and a gas field in troubled Diyala province received no bids, indicating that oil companies are less keen to enter the potential quagmire of Iraq than had been anticipated, despite recent security improvements.

Shahristani acknowledged that oil companies investing in Iraq will need to pay hefty fees to security companies to ensure the safety of employees, which may explain why their prices were so high.

"Some of the oil companies are not very comfortable with the security situation, and this is why they didn't offer acceptable bids," he said.

The process also has been bitterly opposed by some Iraqi politicians, who believe that the fee structure being offered to foreign oil companies represents a surrender of national interests. Shahristani was under intense pressure not to concede too much, said Ruba Husari, founder of the Iraq Oil Forum website.

"In political terms, he can say it wasn't a sellout, that we did not give our oil fields to the international companies at any price," she said.

Shahristani said he thought the prices offered by the government were realistic but he also hinted at the political pressure, saying that his government had sought to balance a fair price for the oil companies with the need "to have a fair deal for the Iraqi people."

But Iraq is equally under pressure to do something to bolster its oil production, which has been sagging as the country's antiquated oil infrastructure erodes after decades of neglect. The government, which is running an $18-billion deficit this year, is being funded by surpluses accumulated in previous years, but it could face difficulties next year, officials say.

Shahristani said he was confident that the contract awarded would be enough to generate an extra $1.7 trillion over the next 30 years from southern Iraq's vast Rumaila oil field. But Husari said she thought the production targets set for the field were "overambitious."

Companies whose bids were rejected by the government were invited to resubmit their offers, which would then be considered by the Iraqi Cabinet. But it was unclear what the time frame would be, or whether a middle ground could be found given the differences that emerged.

The Oil Ministry also plans a second public auction by the end of the year, seeking investments in previously undeveloped oil fields.

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Iraqi oil minister says OPEC to cut production

OPEC members are expected to cut oil production when they convene in March to try to push up prices to at least $70 a barrel, Iraq's oil minister said Saturday.

Hussain al-Shahristani also identified the country's political tensions, bureaucracy and lack of funds as main impediments to developing Iraq's hydrocarbon resources.

OPEC cuts have so far failed to stop the dramatic fall in oil prices since July. The drop has hit Iraq particularly hard. The country depends on oil revenues for nearly 95 percent of its budget. As a result, the government was forced to slash its 2009 draft budget from $80 billion to $64 billion.

"The year 2009 will be a tough year around the world and that will be reflected on the oil demand and then prices will drop," al-Shahristani told a symposium in Baghdad on developing Iraq's oil and gas industry.

"In March, OPEC will convene and there will be an intention for more production cuts to shore up prices and encourage production from non-OPEC members," al-Shahristani added.

"We do believe that the price should be no less than $70 for a barrel."

In December, OPEC announced a 2.2 million barrel production cut aimed at boosting prices that have plummeted from mid-July highs of $147 per barrel. The cuts came on top of another 2 million barrel production cut instituted in the last quarter of 2008.

But oil prices have continued to deteriorate. Benchmark light, sweet crude for March delivery dropped a dollar on Friday to settle at $40.17 a barrel on the New York Mercantile Exchange.

Iraq is a member of the Organization of Petroleum Exporting Countries but is not committed to its production quota because the war-plagued country produces less than its potential.

Al-Shahristani also renewed his objection to oil deals signed between the Kurds and Western oil companies, saying they are a main "impediment" in approving the country's long-awaited hydrocarbon law because they "contradict the law and contradict Iraq's benefit."

The Kurds run a three-province semiautonomous region with vast oil reserves. They argue that the Iraqi constitution gives them the right to unilaterally negotiate and sign oil deals without consulting with the central government in Baghdad.

The Kurds' nearly two dozen deals have left politicians at loggerheads since February 2007.

"Iraq's oil sector should not be taken hostage by the current political situation and it should be freed to be developed properly," he said.

He also called on the government to ease some of its bureaucracy and enable the ministry to have a say on major contracts to speed up development of Iraq's dilapidated oil and gas infrastructure.

"Now, we have dilapidated and eroded pipelines. ... We can't buy new ones because we don't have enough money especially because the 2009 budget has not been approved yet."

Iraq, which sits on the world's third-largest oil reserves - at least 115 billion barrels - has offered 19 oil and gas fields to international companies for development in two major bidding rounds.

Iraq plans to add 4 million to 4.5 million barrels a day to its current 2.4 million barrels per day capacity over the next four to six years. The ministry plans to sign the contracts for the first round in mid-2009 and the second round by the end of the year.

A third bidding round, to be announced this year, will offer 65 exploration blocks nationwide, al-Shahristani said without elaborating.

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A Call for Oil Price Stability

In less than a year, oil prices have gone down partly because of the ongoing global financial crisis. I first thought of the Iraq invasion in 2003 as the major cause of price increase of oil.

Early this year, I've witnessed first hand here in the Philippines how an oil-consuming country gets affected by the continuing rise of oil prices. People literally jammed our light-rail transit system. Those who would normally use their cars to commute to work suddenly found themselves among the throng of people lining up to get a cheap ride on the trains.

I read an article on the dailynews.com today urging cooperation among oil producers and consumers to help stabilize the price and future supply of oil. Will our world leaders finally "talk" about this pressing issue? You can read the whole article from this link:

http://www.newsdaily.com/stories/lj506554-us-london-energy-meeting

Crude continues decline despite signals from OPEC

Oil prices slumped Friday, despite signals from OPEC that it may slash production again, with the markets instead focused on the most recent reports showing drastic cutbacks in spending and consumption by businesses and consumers.

Gasoline prices again fell overnight, prompting one analyst to note a "half price holiday sale on gas" with Americans fueling up for the Thanksgiving holiday at half the price they did in July.

Light, sweet crude for December delivery fell $1.20 to settle at $57.04 a barrel on the New York Mercantile Exchange.

The Commerce Department Friday reported the largest ever October plunge for retail sales and a sharp drop in business inventories. It said retail sales fell by 2.8 percent last month, surpassing the old mark of a 2.65 percent drop in November 2001 in the wake of the terrorist attacks that year.

The decline in sales was led by a huge drop in auto purchases, but sales of all types of products from furniture to clothing fell as consumers retrenched.

That likely means fewer vehicle miles driven, both because of job losses and less trips to the shopping mall and less money spent on vacations. Businesses are slowing down as consumption drags.

The Commerce Department reported business inventories dropped by 0.2 percent in September. It was the first decline since March 2007 and the biggest drop in more than three years, since inventories fell by 0.3 percent in July 2005.

The national average price for regular gasoline fell overnight, down 2.6 cents to $2.152 a gallon, according to according to auto club AAA, the Oil Price Information Service and Wright Express. That is nearly $1 a gallon below what it was a month ago and nearly $2 below where it was in July when prices peaked at $4.11 per gallon.

"We're on a trajectory that cannot be turned around on the short term," Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service, said Friday of gasoline prices.

In his blog Thursday, Kloza estimated that the daily U.S. gasoline bill for the rest of November will be about $750 million per day less that what it was in early July when the cost was $1.55 billion per day.

He said some retailers have noted the actual purchase amounts of gasoline are smaller than what they were over the summer as motorists realize they will pay less for gas the next time they fill up.

He put the odds of oil dropping below $50 per barrel at about 50 percent even as the Organization of Petroleum Exporting Countries repeatedly removes oil from the market to keep pace with deteriorating demand.

An OPEC official said the 13-member states would meet in Cairo Nov. 29 on the sidelines of a previously planned meeting for Arab members of the group.

The official asked not to be named because the Vienna-based organization is not issuing a formal statement.

OPEC held an emergency meeting only three weeks ago and slashed production by 1.5 million barrels a day. Crude has tumbled 8 percent since then.

Analysts say OPEC's rhetoric rarely matches what it does.

Nevertheless, as the economy turns around, consumption of fuel will increase and send oil prices higher.

"In the long run global growth will be restored at some point," Kloza said Friday. "It will do their dirty work for them."

George Littell of Groppe, Long & Littell said OPEC's recent cuts will not be felt for a few more weeks. He noted that prices did not begin to fall this summer until Saudi Arabia ratcheted up production in July.

Littell said oil prices likely will start to rally in a few weeks once OPEC cuts start to hit and cold weather sets in across the country.

Jim Ritterbusch, president of energy consultants Ritterbusch and Associates, said OPEC needs to do something. If OPEC were to maintain production levels, oil consuming countries would be happy, but it probably would drag prices down another $5 or $10 a barrel, he said.

Oil prices have fallen about 60 percent during the last four months after reaching $147.27 in July.

OPEC, which produces about 40 percent of world supplies, has said it may cut production by the end of this month if prices continue to fall.

Before the 1.5 million barrel cut, OPEC said it was taking 520,000 barrels out of daily production. That too was brushed off by the market.

Meanwhile, the government said Friday that natural gas stockpile levels in the U.S. rose more than expected last week, but are 2 percent below the year-ago average.

The Energy Department's Energy Information Administration said in its weekly report that natural gas inventories held in underground storage in the lower 48 states rose by 62 billion cubic feet to about 3.47 trillion cubic feet for the week ended Nov. 7.

Analysts had expected a boost of between 41 billion to 46 billion cubic feet, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

The news sent natural gas for December delivery down less than a penny to settle at $6.312 per 1,000 cubic feet on the New York Mercantile Exchange on Friday.

In other Nymex trading, heating oil futures fell 4 cents to $1.8351 a gallon, while gasoline prices dropped 6 cents to $1.24 a gallon.

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Fuel Price Cut on September 2008

Some relief is on the way. Fuel prices will drop for a second consecutive month at midnight tonight. The Minerals and Energy Department made the announcement last Friday that the retail price of petrol will drop by between 69 and 78 cents per litre. The wholesale price of diesel with 0.05% sulphur content will drop by R1.44 per litre. Diesel with 0.005% sulphur content would drop by R1.46 per litre. This comes as a huge relief to consumers who had been battling with the increased fuel prices a couple of months ago.

The wholesale price of illuminating paraffin will drop by R1.46 a litre and the single maximum national retail price for illuminating paraffin by R1.94 a litre. This is also much welcome for consumers of paraffin who were not happy that the price of paraffin did not drop when the petrol and diesel prices last dropped.

It is now a matter of waiting to see if the fuel prices continue to drop. The drop has been attributed to the strengthening rand and the softening world oil prices. But with the hurricane season approaching it will be interesting to see how oil prices react. We may see oil prices rising due to decreased supply because of the hurricanes.

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