Crude price rebounds then settles

Sam Fletcher
Senior Writer

Crude futures prices rebounded more than $10/bbl in the first 3 weeks of September to a record high of $83.90/bbl Sept. 20 on the New York Mercantile Exchange then fluctuated in a $5/bbl range below that, subsequently closing at $81.22/bbl Oct. 5.

Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, noted for the third consecutive week benchmark US crude futures had traded "in a very narrow range but still near record highs." Although West Texas Intermediate had declined, it was "still $21.45/bbl higher than a year ago," Jakob said.

Many analysts credited the weakness of the dollar for helping to keep energy prices at higher levels than otherwise could be expected. In late September into early October, the US dollar sank to its lowest level against the euro since 2004. The dollar index inched up just 0.4% Oct. 5 amid reports European finance ministers were trying to bring the euro down from record highs against the weakened dollar. That same day US officials said the economy improved with strong employment figures for September.

"Concerns over worrisome economic indicators have undermined oil prices on fears of a slowdown in oil demand growth," said analysts at KBC Process Technology Ltd. in Surrey, UK. They predicted, "Crude oil prices will not hold above $80/bbl, and this will lead to liquidation of speculative length and a sharp drop in oil prices, sooner rather than later."

The Societe Generale Group in Paris said increased refinery maintenance and retreating refining margins should pull down crude prices through reduced demand. "Refining margins are poor everywhere on a sharp fall last week, except in Singapore," group analysts reported Oct. 8. Even so, they said, "It will take time for lower runs to tighten product balances."

'Bullish' indicators
However, analysts in the Houston office of Raymond James & Associates Inc. said: "The global oil outlook looks as bullish as we have seen in many years. We are looking at meaningful oil inventory reductions, despite the following (very conservative) supply-demand assumptions. First, we believe the oil market will continue to overestimate non-OPEC's ability to grow production; this is a trend that will likely continue for the next decade. Second, since non-OPEC oil supply is not going to be able to meet the rising demand, the world is going to be increasingly dependent on the Organization of Petroleum Exporting Countries' ability to increase production. We are assuming that key OPEC producers ramp back up 2008 production to peaks seen in late 2005. Finally, limited oil supply growth forces us to model a slowdown in oil demand growth in both the US and Asia."

Raymond James forecast worldwide oil demand will grow only 1.5% vs. the Paris-based International Energy Agency estimates of 2.4% growth in 2008. "Even with lower demand growth assumptions and Saudi Arabia returning to late 2005 production highs, global oil inventories are likely to fall again in 2008. Ultimately, as worldwide inventories continue to fall and mature oil fields continue their production declines, we expect oil prices to maintain their bullish trajectory. Accordingly, we are increasing our 2008 oil price forecast from $70/bbl to $80/bbl and setting our initial 2009 forecast at $85/bbl," Raymond James analysts said.

Still, KBC analysts point out the "virtual disappearance" of US demand growth in the third quarter. "US expansion appears to have been curtailed as falling house prices dent both consumer confidence and construction activity," they said.

After falling in August, US gasoline inventories were down to 191.3 million bbl in the last week of September. "While this is a massive 22 million bbl below the record high level for this time of the year in 2006, the peak demand season is over, and the threat of hurricane disruption is fast receding. The front month NYMEX gasoline crack has fallen below $3/bbl, which appears to belie stated market concerns over tightness in gasoline. Moreover, it seems to suggest that the current high level of speculative length in gasoline (47,000 contracts) could be vulnerable to liquidation," said KBC analysts.

US distillate fuel stocks were at 135.9 million bbl in the same week—an "adequate level" said KBC analysts. "Thus, with forecasts of a comparatively mild fourth

quarter, speculators might also be carrying a high level of exposure on No. 2 heating oil with a net long position of 37,000 contracts, especially when refinery output rises later in October as the current period of US refinery maintenance draws to a close. Any sell-off in either gasoline or heating oil would also impact on the price of crude," they said.

(Online Oct. 8, 2007; author's e-mail: samf@ogjonline.com)

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