Marching to $100/bbl oil

Sam Fletcher
Senior Writer

When the front-month crude futures contract fell $3.45 to $91.17/bbl Nov. 13—the lowest level in nearly 2 weeks on the New York Mercantile Exchange—after the International Energy Agency reduced estimates of global oil demand for the fourth quarter through 2008, many analysts declared the march to $100/bbl oil had finally fizzled. Imagine their surprise when the January crude contract jumped $3.39 to a record closing of $98.03/bbl Nov. 20, climbing as high as the Nov. 7 record of $98.62/bbl in intraday trading. The price continued climbing to $99.29/bbl in early electronic trading Nov. 21 before closing at $97.29/bbl, down 74¢ for the day on NYMEX. But the push for $100/bbl oil may not be over.

The volume of crude traded Nov. 19 on the New York market was "the lowest level of the last 55 trading days," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, in a Nov. 21 report. In a low-volume, preholiday market, a large pension fund buying oil assets with the weaker dollar could trigger a rally.

Analysts in the Houston office of Raymond James & Associates Inc. blamed the record-low weakness of the US dollar for driving up crude prices. "Credit spreads widened following the Federal Reserve's cut in its growth outlook for next year to a growth of only 1.8-2.5%. This, coupled with the US 10-year Treasury yield falling below 4% for the first time since 2005, sunk the dollar to a new record low [of] $1.4850 vs. the euro," they said.

Moreover, Raymond James said, "Oil was trading up premarket on expectations of colder weather in the Northeast and supply setbacks in Canada and Mexico." Fire damaged a 155,000 b/d oil sands upgrader at Royal Dutch Shell PLC's Scotford refining complex near Edmonton, Alta., on Nov. 18. The upgrader and Shell's adjacent 98,000 b/d refinery were operating at reduced rates Nov. 20. Oil produced by the upgrader is processed through the refinery.

Dollar value
However, analysts at Barclays Capital Research, a division of Barclays Bank PLC, London, claim the weakness of the dollar against other currencies has limited effect on oil markets. "A widespread misconception is that the value of the dollar and the price of oil are linked by a clear indirect relationship. This belief has grown stronger over the past 3 months fueled by the simultaneous acceleration in the fall of the greenback and the move up in oil prices. In our view, the relationship between the two is far more tenuous that many might think. Firstly, there is no evidence that periods of dollar weakness are associated with higher oil prices, and, historically, a wide range of behavior has been displayed," they reported Nov. 21.

"Arguably, a weaker dollar makes oil cheaper for nondollar consumers, whereas it squeezes profits for non-US producers, which should prove supportive for prices over time," said Barclays analysts. "While the magnitude of the effect is far from clear, its transmission would involve substantial time lags. Refiners are often insulated from fluctuations in the value of the dollar as both their inputs and outputs are denominated in the same currency, and any knock-on effect induced by higher-end user demand would likely be in the region of quarters and years rather than days. On these grounds we see very little substance to those explanations which base the latest move-up in oil prices on the deterioration of the dollar, and by contrast we see the tightening of the physical market balance as having a far better explanatory power."

They predicted, "Severe constraints on the supply side and limited room for maneuver by the Organization of Petroleum Exporting Countries in the short term will keep prices vulnerable to supply disruptions and a faster-than-expected erosion of the inventory cover."

OPEC's summit meeting Nov. 17-18 in Riyadh was only the third meeting of member heads of state in the group's 47 years. At that meeting, President Hugo Chavez of Venezuela and President Mahmoud Ahmadinejad of Iran urged that the cartel quit pricing its oil in US dollars in favor of a basket of stronger currencies. Saudi Arabia opposed that move.

Analysts at Barclays Capital Research see little chance for such a change. "It would necessitate a major overhaul of the existing pricing system, given that OPEC crudes are currently priced in terms of dollar adjustments from dollar-denominated benchmarks. The absence of non-US dollar alternatives (the only exception being the yen-denominated contracts traded on the Tokyo Commodity Exchange) would therefore require moving away from current market mechanisms and setting up a brand new pricing system, which we believe is unfeasible," they said.

(Online Nov. 26, 2007; author's e-mail: samf@ogjonline.com)


Related Articles

FourPoint Energy to acquire Anadarko basin assets from Chesapeake

07/02/2015 FourPoint Energy LLC, a privately owned Denver company, plans to acquire oil and gas assets from Chesapeake Energy Corp. subsidiaries Chesapeake Ex...

Puma Energy completes purchase of Murco’s UK refinery, terminals

07/02/2015 Singapore-based Puma Energy Group Pte. has completed its purchase of UK midstream and downstream assets from Murco Petroleum Ltd., a subsidiary of ...

BP to settle federal, state Deepwater Horizon claims for $18.7 billion

07/02/2015 BP Exploration & Production Inc. has agreed in principle to settle all federal and state claims arising from the 2010 Deepwater Horizon inciden...

MARKET WATCH: NYMEX oil prices plummet on crude inventory build, Iran deadline extension

07/02/2015 Oil prices plummeted more than $2/bbl July 1 to settle at a 2-month low on the New York market after a weekly government report showed the first ri...

Shell Midstream Partners takes interest in Poseidon oil pipeline

07/01/2015 Shell Midstream Partners LP has completed its acquisition of 36% equity interest in Poseidon Oil Pipeline Co. LLC from Equilon Enterprises LLC, a s...

MARKET WATCH: Oil prices decline as US crude inventories post first gain in 9 weeks

07/01/2015 Oil prices on July 1 surrendered much of their gains from the day before after the release of a government report showing the first rise in US crud...

USGS: Water usage for fracturing varies widely across shale plays

07/01/2015 The volume of water required to hydraulically fracture wells varies widely across the country, according to the first national analysis and map of ...

OxyChem-Mexichem JV lets contract for ethylene storage

06/30/2015 Ingleside Ethylene LLC, a 50-50 joint venture of Occidental Chemical Corp. (OxyChem) and Mexichem SAB de CV (Mexichem), has let a contract to CB&am...

Forum extends study of subsea integrity

06/30/2015

Work by an industry forum called SURF IM Network, which studies oil and gas subsea integrity management, has been extended by 3 years.

White Papers

2015 Global Engineering Information Management Solutions Competitive Strategy Innovation and Leadership Award

The Frost & Sullivan Best Practices Awards recognise companies in a variety of regional and global...
Sponsored by

Three Tips to Improve Safety in the Oil Field

Working oil fields will always be tough work with inherent risks. There’s no getting around that. Ther...
Sponsored by

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by
Available Webcasts


OGJ's Midyear Forecast 2015

When Fri, Jul 10, 2015

This webcast is to be presented by OGJ Editor Bob Tippee and Senior Economic Editor Conglin Xu.  They will summarize the Midyear Forecast projections in key categories, note important changes from January’s forecasts, and examine reasons for the adjustments.

register:WEBCAST


Predictive Analytics in your digital oilfield - Optimize Production Yield and Reduce Operational Costs

When Tue, Jul 7, 2015

Putting predictive analytics to work in your oilfield can help you anticipate failures, plan and schedule work in advance, eliminate emergency work and catastrophic failures, and at the same time you can optimize working capital and improve resource utilization.  When you apply analytic capabilities to critical production assets it is possible to reduce non-productive time and increase your yield.

Learn how IBM's analytics capabilities can be applied to critical production assets with the goal of reducing non-productive time, increasing yield and reducing operations costs.

register:WEBCAST



On Demand

Cognitive Solutions for Upstream Oil and Gas

Fri, Jun 12, 2015

The oil & gas sector is under pressure on all sides. Reserves are limited and it’s becoming increasingly expensive to find and extract new resources. Margins are already being squeezed in an industry where one wrong decision can cost millions. Analyzing data used in energy exploration can save millions of dollars as we develop ways to predict where and how to extract the world’s massive energy reserves.

This session with IBM Subject Matter Experts will discuss how IBM Cognitive Solutions contribute to the oil and gas industry using predictive analytics and cognitive computing, as well as real time streaming for exploration and drilling.

register:WEBCAST


The Alternative Fuel Movement: Four Need-to-Know Excise Tax Complexities

Thu, Jun 4, 2015

Discussion on how to approach, and ultimately embrace, the alternative fuel market by pulling back the veil on excise tax complexities. Taxes may be an aggravating part of daily operations, but their accuracy is crucial in your path towards business success.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected