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Crude finds 'comfortable' price range

Sam Fletcher
OGJ Senior Writer

The “most comfortable” range for crude prices would be $65-75/bbl—“$10/bbl below the minimum of what is the desired price in broad terms for the key producers” within the Organization of Petroleum Exporting Countries, said Paul Horsnell, a managing director and head of commodities research at Barclays Capital in London.

Horsnell does not expect crude prices to remain locked between $65-75/bbl. However, he said, “If prices moved outside the range, we would expect them to move back within it in a reasonably short time.” Horsnell reported Aug. 26, “After the initial pullback in prices in early July, the range has held very firm indeed. Front-month Brent prices have remained completely within the $65-75[/bbl] range throughout every trading day since July 20, while front-month West Texas Intermediate has stayed within the range at all times since July 24.”

During the most recent price rollback, he said, “WTI bottomed intraday at $65.23/bbl. Likewise, during the past week’s move to the top of the range, the highest intraday price for front-month Brent [was] $74.97, while the highest for front-month WTI was $75 exactly.”

The front-month October crude contract traded “in a perfect $70-75/bbl range” Aug. 24-28 on the New York Mercantile Exchange, said Olivier Jakob at Petromatrix, Zug, Switzerland. In that last full business week of the month, the contract failed to climb above $75/bbl, then tested but failed to break through the $70/bbl floor, finally finishing the week by closing at $72.74/bbl on the New York Mercantile Exchange—down a little more than $1/bbl for the week and “very close to the mid-range of $72.50/bbl,” Jakob said.

“From equity to currencies to oil, it seems that the focus of all markets is the lack of liquidity, Jakob said earlier that week. “In that environment, ranges are hard to break.”

Horsnell sees “a strong fundamental reason” for the $65-75 range to remain dominant this quarter. “The range brings the market to the threshold of meeting the price targets of key producers, but still leaves a discount,” Horsnell said. It is “a significant enough” increase from second quarter prices to reflect improvements in market data and macroeconomic prospects “without sending a signal for supply-side pressure to be eased significantly.” He added, “Likewise prices in that range would not appear to be discounted so much in the face of weak short-term data flow as to create any impetus for further tightening. All in all, looked at from a purely fundamental and policy basis, the $65-75 range looked to us like the Goldilocks range for the quarter.”

Japanese politics
Crude and other commodities were down further in early trading Aug. 31, as weakness in Asian markets pressured US equities and a strengthening dollar undercut oil prices. “Markets in Japan, Asia's second-largest consumer of oil, were down upon news that Japanese manufacturers only increased output by 1.9% in July after posting a 2.3% increase in June,” said analysts in the Houston office of Raymond James & Associates Inc.

They reported, “With the left-of-center Democratic Party set to form Japan's new government after its landslide victory on [Aug. 30], Japanese climate change policy is likely to become more ambitious, i.e., more aligned with Europe. Historically, Japan has been closer to the US in taking an ambivalent stance on climate issues. While Japan already has some of the world's highest levels of energy efficiency, there is room for more pro-renewables policies. Also, Japan is likely to play a more active role in the global climate talks leading up to the Copenhagen conference in December.”

Jakob said, “The concern in the global economic picture is that while there has been some improvement in manufacturing activity, it is not yet certain that it will be followed by sustained consumer spending.” He said, “With the European consumer already filled up on heating oil stocks and large layers of distillate stocks afloat on the water, the solver to this overhang would be a strong reduction of refinery runs in front of the winter. However, with the rebounding industrial demand, any strong reduction of refinery runs could seriously tighten the naphtha markets.”

At the end of August, Norway’s Frontline, the largest independent oil tanker shipping group, estimated 40-45 very large crude carriers (VLCCs), or 10% of the world fleet, were storing crude oil, down from a peak of 60 VLCCs that were storing crude in April. In New Orleans, analysts at Pritchard Capital Partners LLC said, “This gradual unwind appears to be flattening of the crude curve and will most likely lead to lower volatility across the crude curve.”

(Online Aug. 31, 2009; author’s e-mail: samf@ogjonline.com)


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