Crude Dips on Storm Downgrade

Tropical Storm Chris loses strength, dragging down energy prices.
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Updated from 11:01 a.m. EDT

Oil futures dipped Thursday after a tropical storm in the Caribbean fizzled out, allaying fears it would enter the Gulf of Mexico and hit the region's oil installations.

By this morning, Tropical Storm Chris was losing strength and was barely considered a tropical storm. Its top sustained winds were 40 miles per hour, well below the 74 mph required to be classified a hurricane. The storm, expected to hit Cuba by Friday, may fizzle out before it even enters the gulf on Monday.

Traders had been closely eying the storm on Wednesday as it picked up strength and seemed poised to become a hurricane. Hurricanes Katrina and Rita closed much of the gulf's oil and natural gas industry last year and drove prices up to highs not seen since the early 1980s. Nearly a year later, the region has still not fully recovered, with 12% of the region's oil production still offline.

Light sweet crude for September delivery closed down 35 cents to $75.46 a barrel on Nymex after touching an intraday high of $76.19. The decline dragged down the rest of the energy complex, with gasoline down 4 cents to $2.29 a gallon and heating oil off 1 cent to $2.11 a gallon.

Natural gas gave back 50 cents to $7.29 per million British thermal units (BTU) after the Energy Department reported a 19 billion cubic feet increase in domestic inventories. At 2.7 trillion cubic feet, supplies are currently 15% over last year's levels and 19% over the five-year average. The rise came despite scorching temperatures across much of the country.

Natural gas, which is used by many utilities to produce electricity, has soared in recent days as a heat wave gripped the Northeast and Midwest, sparking outages and peak electricity consumption. On Wednesday, futures hit $8.54 before settling at $7.79 per million BTUs.

Although the heat wave was expected to break by Thursday evening in the Northeast, natural gas futures could easily rebound on hot temperatures or another hurricane in the Gulf of Mexico. The hurricane threat is particularly great because this season is expected to be active, and around a quarter of the country's natural gas production is located in the gulf.

Regardless of the weather, energy prices are likely to remain high thanks to skyrocketing demand and slim supplies. The world consumes around 85 million barrels of crude per day, and there is little to cover any long-term production glitches. Oil prices have jumped 24% this year on output cuts in Nigeria, Africa's largest producer, Iran's refusal to stop uranium enrichment and fighting in Lebanon between Israel and the militant group Hezbollah.

High oil prices have translated into fat profits at energy companies over the past year. During the second quarter,

Exxon Mobil

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recorded its second-highest quarterly results ever, with earnings up by 36% to $10.36 billion.

BP

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,

Chevron

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,

ConocoPhillips

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and

Royal Dutch Shell

(RDS.A)

also saw profits zoom up by at least 18%.

On Thursday, French oil giant

Total

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posted a 16% increase in net income during the second quarter, largely powered by a run-up in oil prices. Profit came in at 3.44 billion euros, or $4.4 billion, up from 3.08 billion euros.

Following attacks on its oil installations in Nigeria, maintenance shutdowns and production-sharing agreements, output slumped 9% to 2.29 million barrels of oil equivalent -- its lowest level in five years. But Total said it expected output to rebound next year as new projects came online.

Refiners, thanks to gasoline prices that have topped $3 a gallon, have also posted equally stellar results this year. Prices have soared in large part due to a government-mandated switch to ethanol that came at the same time as seasonal maintenance. The second quarter, during which the bulk of the changes occurred, resulted in record profits. On Thursday,

Sunoco

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clocked in a 76% increase in profits to $426 million, or $3.22 per share. Revenue rose from $7.9 billion to $10.6 billion.

Deutsche Bank upgraded Sunoco's stock from hold to buy and helped send shares up by $4.25, or 6%, to $75.36 in recent trading.

The country's largest independent refiner,

Valero Energy

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, had its best quarterly profit ever, posting $1.9 billion, or $2.98 a share, in the second quarter. During the same period last year, net income was $843 million, or $1.53 a share. Revenue jumped to $26.8 billion, up from $18 billion last year.

Valero shares were recently up 1% at $67.85

At

Marathon Oil

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, earnings were just as positive, but the stock was recently down 2% to $86.78. The refiner earned $1.75 billion in the second quarter, or $4.80 a share, vs. $673 million, or $1.92 per share.

Excluding the sale of its Russian exploration and production businesses, and taxes and losses related to U.K. natural gas contracts, Marathon made $1.52 billion, or $4.16 a share, compared to $755 million, or $2.16 a share.