The May benchmark US crude contract jumped above $107/bbl Mar. 27 in the New York market following the bombing of a primary export oil pipeline in southern Iraq. It fell nearly $2/bbl Mar. 28 when Iraqi officials said shipments through that system were back to normal. However, the price rebounded above $106/bbl in early trading Mar. 31 as the US dollar slipped to a low of $1.5895 against the euro. Long-term weakness of the dollar encouraged investors to hedge against the tumbling currency by buying crude and gold futures.
The attack was the first since 2004 on one of two main pipelines to Iraq's primary oil export terminal. Consequently, Paul Horsnell, Barclays Capital Inc., London, said, "We see events in Iraq as having taken a dangerous turn, with the stability of the southern oil system now starting to become a potential concern." He said, "Arguably considerations of the current geopolitical context have been playing a very minor role in oil trading strategies in recent months. Equally arguably, they perhaps should now be playing a larger role, given that the key geopolitical issues have remained raw and unresolved, and because the reduction in global crude inventories has meant less cover and more potential for volatility."
Although traders previously focused on the disruption of Iraq's oil exports from its northern fields, Horsnell said, "In the short-term, the main danger has always been an unraveling of the precarious balance between competing factions and other interest groups in the south of Iraq. What has occurred so far is not yet a full unraveling, but it certainly represents a series of steps towards some potentially dangerous outcomes."
Oil at 'turning point'
Oil is "at a turning point" for a $10/bbl move in either direction, depending on the strength or weakness of the dollar, said Olivier Jakob, Mar. 28, at Petromatrix, Zug, Switzerland. "The dollar index is now back to testing the record low support, and it will remain the trigger for West Texas Intermediate to test the record-high resistance. If the euro manages to climb towards $1.60, WTI will break $110/bbl towards $115/bbl, and if the dollar manages to rebound like in mid-March, WTI will break $100/bbl towards $95/bbl." He said, "The gasoline crack is falling back to counter-seasonal values and will remain under pressure in any dollar rally."
As the dollar index gave back its gains during the week of Mar. 23-29, the May crude contract also "gave back its losses," Jakob said Mar. 31. "The euro is now facing a strong resistance line and the fate of crude oil will depend very much on whether the euro manages to break the $1.585 resistance towards $1.60. If the euro was to break towards $1.60, then the correlation trade should push West Texas Intermediate to break $110/bbl towards $115/bbl. There is nothing really fundamental about that, but it is a prevailing technical trade."
Meanwhile, Paul Sankey, senior energy analyst for Deutsche Bank, New York, said it's not the speculators who are pushing up oil prices as many claim. "Oil supply is weak and global demand is strong, so the oil price is high," he said. "Supply spare capacity is terribly weak, almost scarily so." Sankey noted, "Spot delivery global gas (LNG) is trading at $20/MMbtu, or $200/bbl of oil equivalent. There are no 'speculators' in that market."
On Mar. 28, Adam Sieminski, global energy economist for Deutsche Bank, lifted his average price estimates to $95.75/bbl for crude and $9.25/MMbtu for natural gas in 2008 and to $102.50/bbl and $10.75/MMbtu in 2009. "These 2009 forecasts still leave upside room to prior peaks in both oil and gas when adjusted for inflation and income growth," he said.
Sieminski said, "World oil markets are starting to loosen up 'fundamentally,' but the degree of tempering does not appear to be acute and corrective forces are taking time." His latest forecast for the global economy puts world gross domestic product growth for 2008 at 3.5%—"significantly less than the 4.6% forecast in December 2007, but not a recession," he said. "Higher prices and slower GDP are starting to erode demand; nevertheless, oil demand is expected to rise by at least 1 million b/d in 2008 and by even more than this in 2009," said Sieminski. "Current non-OPEC supply growth forecasts look for a rise of 1 million b/d for 2008 and 2009. This suggests that the 'call on OPEC' for 2008 and 2009 will not be under much, if any, downward pressure. Markets remain tight while geopolitical forces and asset allocation factors provide support."
(Online Mar. 31, 2008; author's e-mail: email@example.com)