For the first time ever, a front-month crude contract hit $100/bbl Jan. 2 before closing at $99.62/bbl, up $3.64 for the day in the initial trading session of 2008 on the New York Mercantile Exchange. The previous intraday high for front-month crude was $99.29/bbl Nov. 21.
The February contract climbed to $100.09/bbl Jan. 3 on NYMEX before slipping to a $99.18/bbl close. However, Olivier Jakob of Petromatrix GMBH, Zug, Switzerland, claimed the Jan. 3 record marked "the first real attempt to break the [$100/bbl] mythical level," since the Jan. 2 sale "was only a controversial one-lot transaction done on the floor away from computer trading." Jakob said, "The three-digit number provided strong resistance, but with a late buying wave maintaining the close within $1 of $100/bbl, we would expect to see further attempts at breaking it."
Jakob said, "Technically the positive momentum is still valid, and the risk remains for a strong advance when and if [a closing price of] $100/bbl is [achieved], as the next target will then jump to $105/bbl."
Jakob said, "While crude oil at $100/bbl makes a nice headline, the story is not about oil but about commodities. . . We expected a strong start of the year for commodities on the back of passive investment flows, and the tone of the first trading day of the year confirmed the trend. Pension funds will allocate more investment to commodities during the first quarter while reducing exposure to equities."
The Energy Information Administration reported US crude stocks plunged 4 million bbl to 289.6 million bbl in the week ended Dec. 28, well below market expectations of a 1.7 million bbl drop. Gasoline inventories gained 1.9 million bbl to 207.8 million bbl in the same week. Distillate fuel inventories gained 600,000 bbl to 127.2 million bbl.
Although the latest data showed "another strong week for demand," it was not enough to offset rising supply, resulting in an increase in refined product inventories, said Jacques H. Rousseau at Back Bay Research LCC, a research partner for Soleil Securities Corp.
Analysts in the Houston offices of Raymond James said "mixed signals" on US stocks possibly contributed to a slight pullback in crude prices Jan. 3. "Also, tanker rates have skyrocketed out of the Middle East, indicating stronger production (i.e. more cheating)," among members of the Organization of Petroleum Exporting Countries, they said.
However, Jakob said, "The draw in crude oil stocks was expected due to the end-of-year tax savings. The crude stock change during January will be a better fundamental barometer since the December draws are only bullish if not met by a rebuild during January."
The final US weekly data for 2007 show US crude inventories ending the year some 65 million bbl lower than the peak at the end of June, said Paul Horsnell of Barclays Capital Inc., London. "The sharp down-trend in crude inventories has taken them from well above their 5-year average to 6.8 million bbl below that average. Allowing for crude oil held as pipeline fill, refinery and tank bottoms, (i.e., the minimum operating requirement), we estimate that the level of discretionary commercial US crude inventories has now fallen by about 60% over the past 6 months. What was a significant overhang is now a deficit relative to normal patterns," he said.
Raymond James analysts said, "Also putting upward pressure on crude prices is the worry that OPEC has minimal spare capacity. Shokri Ghanem, the chairman of Libya's National Oil Corp., recently stated, 'OPEC's production is already close to maximum capacity, and the organization can do nothing to curb prices.' However, Indonesia, the second-smallest OPEC producer, has announced its intention to request a 500,000 b/d production increase during OPEC's Feb. 1 meeting."
Jakob said, "OPEC is right to say that the price of oil is driven by financial flows rather than supply and demand, but they are wrong to say that they can not do anything about it. It would need either a much stronger US dollar or a wide contango to bring enough speculators back to the short side to offset the buying coming from pension funds. OPEC can not do much about the dollar, but it has the power do something about moving the current backwardation back to a contango. For that, OPEC would need the resolve to oversupply rather than supply, but it has not shown yet such intention." He said passive investment flows will not stay idle until OPEC's next meeting, "hence the risk remains on the upside."
(Online Jan. 7, 2008; author's e-mail: email@example.com)