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US crude tops $73/bbl, may head higher

Sam Fletcher
Senior Writer

After testing price barriers during intraday trading for five consecutive sessions, the near-month benchmark US crude contract closed above $73/bbl in New York on July 13, and analysts said it could be headed higher this summer.

The August contract for benchmark US light, sweet crudes touched an 11-month intraday high of $74.01/bbl July 13 before closing at $73.93/bbl, up $1.43 for the day on the New York Mercantile Exchange. That same day in London, speculators pushed North Sea Brent crude to an 11-month high of $77.70 in intraday trading via the IntercontinentalExchange Inc.—less than $1 short of the all-time high of $78.65/bbl last August—on reports of production problems in the North Sea and forecasts of rising demand.

As the August crude contract surged past $74/bbl in early trading July 16 before NYMEX opened, analysts at the Société Générale Group said US oil prices were "shifting to the left, now centered beyond $74/bbl."

Having punched through the $73/bbl, the front-month crude contract may possibly climb to $75/bbl on New York commodity market, said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. He noted that benchmark US crude prices continued to rise "for a fifth week in a row with a maintained momentum bringing $75/bbl within reach and searching for the highs of last year." He said market dynamics remained "in a very strong technical momentum but still in overbought territory."

Earlier, Jakob said the "impressive" speculative assault for higher crude prices "will need to have the support of the products" market to be sustained. He said, "European simple refinery margins are already in the red and if the trend of rising Brent and falling gasoline [prices] was to continue, then the European complex refining margins will start to also be under serious pressure."

Adam Sieminski, chief energy economist, Deutsche Bank AG, New York, said his bank raised its price forecast for West Texas Intermediate and Brent crude to an average $60/bbl in 2010. "This compares with our prior $45/bbl estimate for both benchmarks and an average of $20/bbl in the 1990s," he said. "US natural gas prices are forecast to average $8/MMbtu in 2010, up from a prior $7/MMbtu."

Sieminski said, "A key justification for this move is that finding and development costs are rising rapidly and these are expected to rise further over the next few years. Moreover, geopolitical challenges to supply are also deteriorating, at least for now. Demand has not been as responsive to higher energy prices due to the growth in real incomes. Plausible substitutes for oil and gas are expensive. The timeframe for inducing the changes that could bring oil and natural gas prices down is getting longer."

IEA sees more demand
In its weekly report issued July 13, the International Energy Agency in Paris said Brent futures prices surged past $77/bbl in mid-July because of tight market fundamentals, increased geopolitical tension in some major oil producing countries, and indications of strong buying of petroleum futures by investment funds. "Falling refining margins suggest that market tightness is shifting from product to crude markets," IEA officials said.

IEA expects global demand for petroleum products to rise by a robust 2.5% to 88.2 million b/d in 2008, due to a weather-related rebound in the Organization for Economic Cooperation and Development member countries and strong demand in non-OECD countries. "This represents an increase of 2.2 million b/d, from the slightly revised 2007 level of 86 million b/d," the agency said.

IEA sees production capacity of the Organization of Petroleum Exporting Countries increasing by 2 million b/d to an average 35.4 million b/d next year, with non-OPEC production increasing by 1 million b/d to 51 million b/d. "Key growth drivers include the former Soviet Union, Latin America, and global biofuels. OECD Europe and North America [will] continue to see production decline, despite strong growth from the US Gulf of Mexico and Canadian oil sands," IEA predicted.

Jakob said, however, "After over-estimating non-OPEC supply for many years, IEA is now over-estimating oil demand." He said, "The IEA has started to make downward revisions to 2007 oil demand but [is] still forecasting a 400,000 b/d demand growth in North America for the third quarter while the US Department of Energy is showing zero growth in the 4-week average; [it is] still forecasting demand growth for Europe in the third quarter when data released July 12 for Germany still shows demand down in June by 9.7%, Italy down by 2.9%, etc."

This feature will appear next on July 30.

(Online July 16, 2007; author's e-mail: samf@ogjonline.com)


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