Anticipating $100/bbl oil

Sam Fletcher
Senior Writer

Crude prices swung sharply during the trading week of Oct. 29-Nov. 2, fluctuating at record levels of $93-95/bbl that had many analysts anticipating $100/bbl oil within weeks.

"It was a rollercoaster week for oil prices," said Robert S. Morris, Banc of America Securities LLC, New York. The market got a boost at midweek with a larger than expected drop in crude inventories for the second straight week.

On Oct. 29, the December contract for benchmark US crudes climbed to record highs for the fifth consecutive trading session, setting new intraday and closing records above $93/bbl on the New York Mercantile Exchange, due to a weak dollar and stormy weather that shut in some of Mexico's crude production the previous week.

But then prices tumbled to $90.38/bbl Oct 30 in the largest correction of the year as Goldman Sachs Group Inc., New York, advised investors to take their profits from the recent rally. "Nowadays the price of oil is set not by a few countries in the Middle East, but by a few banks on Wall Street," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The Goldman report will very surely push some market participants to turn from buying the dips to selling the rallies," he predicted at the time.

'Mother of stock draws'
On Oct. 31, however, the crude contract rebounded to a record $94.53/bbl closing then continued climbing to $95.28/bbl in after-hours electronic trading on NYMEX as the US Department of Energy reported "the mother of all stock draws" from commercial crude storage at Cushing, Okla., instead of the slight build that traders were expecting for the week ended Oct. 26.

"We thought the size of the [Oct. 30] correction had diminished the chances that we would be able to open the $95/bbl doors to $100/bbl," said Jakob. But with such extreme volatility, he said, "It is impossible to exclude the reach of $100/bbl before the end of the week."

Paul Horsnell at Barclays Capital Inc. in London said, "Our conservative expectation is for [benchmark US crude] to average $90.70/bbl this quarter."

Most of the drawdown was at the key Cushing, Okla., delivery point for NYMEX, where oil stocks fell 3.1 million bbl to 15.1 million bbl. "The world economy is taken hostage by a few million barrels in Cushing, and there is little that the Organization of Petroleum Exporting Countries can do about it," Jakob said then.

The sharp drop in crude inventories "occurred without any uptick in refinery runs, following only a minor rise in imports," Horsnell noted. "The overall build [of crude and petroleum products] is down to its lowest since October 2005," he said.

Record low dollar
The US dollar hit a record low against the euro Oct. 31 after the Federal Open Market Committee cut the federal funds rate (the rate commercial banks charge on overnight loans among themselves) by 0.25 percentage point to 4.5%. "The single variable that exhibits the strongest correlation to the rise in oil prices over the past year is the concurrent drop in the US dollar," Morris said.

The December crude price fell to $93.49/bbl Nov. 1 on NYMEX, but not before setting a new intraday price record of $96.24/bbl. Again the influencing factors were outside the fundaments of supply and demand for oil; instead, the value of the dollar improved against the euro on Nov. 1. Oil usually moves in the opposite market direction from the dollar, since a stronger dollar reduces the appeal of commodities as a hedge against inflation.

On Nov. 2, the December crude price rebounded to a record closing of $95.93/bbl amid indications of a stronger US economy and possible new United Nations sanctions against Iran over its nuclear power program. "The US government reported twice as many new nonfarm jobs as expected were added in October, which alleviated fears of an economic downturn, at least for the moment," Morris said. Meanwhile, the British Foreign Office said the UN Security Council agreed to draft a new sanctions resolution that could be passed in November unless Iran cooperates with the International Atomic Energy Agency.

Refinery problems contributed to the Nov. 2 price rise in crude prices. Petroplus Holdings AG's 172,000 b/d refinery in England expects production to be limited for a month due to a fire. Chevron Corp. said its 330,000 b/d refinery in Pascagoula, Miss., will operate at reduced rates until early next year because of a fire in August.

(Online Nov. 5, 2007; author's e-mail: samf@ogjonline.com)

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