'Goldilocks range' of prices

Sam Fletcher
OGJ Senior Writer

Top producers—especially key members of the Organization of Petroleum Countries—seek a “Goldilocks range” of crude prices, “neither too hot nor too cold for both producers and consumers,” said Paul Horsnell, head of commodities research at Barclays Capital, London, in a recent report.

“It should be a range that maintains investment incentives and continuing macroeconomic equilibrium for producers, without creating too powerful a feedback effect on consumer economies and without overly endangering oil's share of the longer-term energy mix,” Horsnell said.

That’s likely to be $75-85/bbl, with $100/bbl apparently “fairly close to the maximum level that could be accepted” before stimulating major resistance from consumers, he said.

Prior to the May 28 OPEC meeting, Saudi Arabia Oil Minister Ali I. al-Naimi said the world economy was showing enough signs of recovery to cope with $75-80/bbl oil.

In early June, analysts with the Goldman Sachs Group Inc. raised their 2009 crude price forecast to $85/bbl from $65/bbl previously, with the possibility of approaching $100/bbl by the end of 2010.

However, at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts noted, “As recently as the end of April, Goldman forecast that $45/bbl was in sight due to stubbornly high oil stocks and weak oil demand. Adding more confusion to this about-turn is that in March Goldman forecast a ‘super-spike’ to $105/bbl, and, of course, who can forget last summer’s forecast of $200/bbl oil. But are they right this time?”

Analysts in the Houston office of Raymond James & Associates Inc. said, “Overall economic optimism is running rampant,” partly fueled by reports of a slowdown in job losses and a drop in initial clams for unemployment benefits.

A $70/bbl ceiling
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “Bears have shown that they have a weak hand, but Bulls will now have to show that they are strong enough to go through the resistance of $70/bbl.”

On June 5, the front-month crude contract temporarily topped $70/bbl on the New York Mercantile Exchange for the first time in 7 months, climbing to $70.32/bbl before closing at $68.44/bbl. The price rise was tempered by comments from the International Energy Agency and others that the recent rally was not supported by market fundamentals.

Meanwhile, the dollar strengthened as the US economy appeared to stabilize. “Should dollar strength persist, it is possible the current rally in crude and commodities could pause,” said analysts at Pritchard Capital Partners LLC, New Orleans.

They said, “If crude does not break $70[/bbl], the momentum players may lose interest. However, strength in oil and most commodities will most likely be dictated by the direction of the US dollar and US government bond yields.”

KBC analysts said, “One of the justifications for oil prices within spitting distance of $70/bbl is that recovery is on the way and commodities investors are getting in on the ground floor. But good economic news is pretty thin on the ground, and you have to be an incurable optimist to believe that demand is going to recover any time soon in the Organization for Economic Cooperation and Development economies.”

They cited “the sobering forecast” by the IEA that global electricity demand will fall this year for the first time since 1945, down 3.5%. “Even in past recessions electricity demand has never fallen,” they said.

KBC analysts earlier said, “For front-month prices to continue to rise, traders will need to be prepared either to elevate the whole forward price curve, which would seem to be premature given the extent of OPEC spare capacity, or to accept a further flattening of the forward curve, which would accelerate the movement ashore of oil from floating storage. This in turn would show up in onland stocks and weaken market sentiment.”

They said, “This now seems to be unfolding in the market, with $70/bbl possibly a short-term ceiling to oil prices until all oil in floating storage has been brought ashore. Moreover, a downward correction cannot be ruled out especially given the speculative length. However, crude may continue to trade higher with equities. All outcomes are possible in a market driven by others’ perceptions of the future.”

KBC analysts added, “It seems that OPEC cohesion is weakening with May output rising to 28.2 million b/d and compliance with agreed cutbacks slipping to 75%. But the surge in oil prices has spared OPEC the difficult task of either seeking to boost compliance or making a further cut that might have been met by some disbelief in the oil market.”

(Online June 8, 2009; author’s e-mail: samf@ogjonline.com)

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