Crude climbs to higher price range

Sam Fletcher
OGJ Senior Writer

On Oct. 14, the front-month crude contract closed above $75/bbl on the New York Mercantile Exchange for the first time since the same date in 2008, ending a long period when intraday prices were “neatly shoe-horned” into a precise $10/bbl range. The next day, it traded as high as $77.97/bbl before closing at $77.58/bbl. “If the dollar does not strengthen, crude will probably test $80 within the next week,” predicted analysts at Pritchard Capital Partners LLC in New Orleans.

Benchmark NYMEX crude “first got within range of $75/bbl all the way back in June,” said Paul Horsnell, managing director and head of commodities research at Barclays Capital in London. “Barring a few days in early July when fears about spare storage at Cushing, Okla., running out got somewhat overblown, it has been $65 to $75 range trading all the way.” Now, he said, “For the first time in months, the future exists.”

It won’t be a radical change from the market’s past performance, however—more likely a transition to a new $70-80/bbl spread, with $70/bbl “perhaps starting to seem more like the bottom of the range than the middle,” Horsnell said.

The price breakout occurred amid continued optimism that the economy is recovering, even as the US dollar hit a 14-month low against the euro. On Oct. 14, the Dow Jones Industrial Average climbed above the 10,000 level for the first time since early October 2008—the latest in a series of indications of a more robust economy.

Yet industry analysts looked in vain for major improvements in supply and demand fundamentals to support the oil price increase. Instead, the dollar index appeared to be the main influence on crude prices. Olivier Jakob at Petromatrix, Zug, Switzerland, expressed the outlook of many market observers when he said: “Based on [supply and demand] fundamentals, we have no confidence at all in the current oil rally.” The world economy was not able to digest crude prices above $100/bbl in 2007, Jakob noted. “So we need to stay cautious before thinking it can digest $80/bbl oil now,” he said.

Jakob said, “To be convinced that we are not in the middle of a dollar bubble and that genuine recovery is behind the rise of the stock market and genuine oil demand behind the rise of the oil markets, we would want to see both of them continuing their advance under a stable dollar. For now we have nothing but a falling dollar and because of that we have to remain extremely cautious about the current dynamics in equities and energy.”

Gas and winter
The Energy Information Administration reported the injection of 58 bcf of natural gas into US underground storage in the week ended Oct. 9. That boosted the total working gas in storage above 3.7 tcf, approaching total capacity of 3.9 tcf with 3 weeks left in the gas-injection season. Storage was then 450 bcf higher than a year ago and 474 bcf above the 5-year average. “While the next few injections may appear bullish, we are experiencing a record cold mid-October and, with storage almost full, continue to face storage constraints,” said analysts in the Houston office of Raymond James & Associates Inc.

Meanwhile, Joe Bastardi, chief meteorologist for AccuWeather.com, predicts a fading El Nino will produce “the stormiest and coldest” winter in recent years over an area from Maryland to the Carolinas as results in the southern and eastern US.

“The areas that will be hit hardest this winter by cold, snowy weather will be from southern New England through the Appalachians and mid-Atlantic, including the Carolinas,” he said in mid-October. Eastern Seaboard areas that had little snowfall the past two winters should expect above-normal snowfall. New York, Boston, and Philadelphia could get up to 75% of their total snowfall in “in two or three big storms,” he said. Snowfall in some parts of the Appalachians could reach 50-100 in.

Bastardi expects the winter storm track to bring storms into southern California, across the South, and up the Eastern Seaboard. That would differ from the last 2 years, when storms tracked farther west from Texas into the Great Lakes, bringing unseasonably mild weather to major East Coast cities. In the South, the Interstate 20 corridor from Dallas to Atlanta will be “a strike zone for ice and snow,” Bastardi said. “It is not out of the question that snow and ice are as far south as College Station and San Antonio, Tex.”

(Online Oct. 19, 2009; author’s e-mail: samf@ogjonline.com)

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