Crude prices climb in early October

Sam Fletcher
OGJ Senior Writer

The price of front-month crude oil rose Oct. 8, its sixth increase within eight sessions in the New York market. The November contract for benchmark US light, sweet crudes rose 5% to consecutive new 7-week highs over the two final September sessions, then increased another 2% to $81.58/bbl Oct. 1, closing above $80/bbl for the first time since Aug. 10. It climbed as high as $84.09/bbl in intraday trading Oct. 6 on the New York Mercantile Exchange before closing at a 5-month high of $83.23/bbl, up 41¢ for the day. It dropped to $81.67/bbl Oct. 7, then rebounded to $82.66/bbl Oct. 8.

“Crude prices rose 1.5% as the dollar remained near 15-year lows vs. the yen and weakened against other major currencies,” said analysts in the Houston office of Raymond James & Associates Inc.

At Standard New York Securities Inc., the Standard Bank Group, Walter de Wet said Oct. 11, “Crude has had an impressive price rally in the last 3 weeks. Front-month West Texas Intermediate futures contract gained $9/bbl (a 12.2% increase).”

The general surge in crude prices resulted from “a cocktail” of factors, said analysts at KBC Energy Economics, a division KBC Advanced Technologies PLC in Surrey, UK. “High up on the list is the market’s belief that the US will soon adopt further stimulus measures for the economy, which would keep the dollar low and boost equities, both of which would tend to support oil prices. Fresh signs that the Chinese economy is still booming and less weak than expected recent economic data in the US, have also helped. While the market has for now turned its gaze away from weak oil market fundamentals and the simmering debt crisis in Europe, however, we continue to believe that these will prove a drag on prices in the coming months,” the analysts said.

Good timing for OPEC
KBC analysts said crude prices above $80/bbl “couldn’t have been better timed” prior to the Oct. 14 meeting of the Organization of Petroleum Exporting Countries. Analysts generally expected no major changes in production or policies at that meeting.

If prices were to rise above $80/bbl on a sustained basis, it would cause concern among large gulf producers who don’t want high prices to damage the economic recovery. “But if prices did spiral higher, we believe Saudi Arabia would simply use the spare capacity it holds to dampen the price rise,” KBC analysts said. “OPEC will find it easier to live with poor compliance and high prices than open the Pandora’s Box of how to allocate any formal increase in production by revising quotas. The kingdom is keen to regain the market share it lost to Russia (among others) as a result of its own production restraint. Prices have held in the $70-80/bbl range for most of this year despite OPEC compliance that at times has drifted as low as 50%.”

De Wet said, “The renewed bullish spirit by the noncommercials has been fuelled by the belief that the US Federal Reserve would start a fresh round of quantitative easing in November. The US dollar has been duly weakening. The impact on the oil price became rather evident late last week when a better-than-expected jobless claim numbers [on Oct. 7] saw the crude oil price slip, while a worse-than-expected nonfarm payroll number on [Oct. 8] appeared to move the oil price up. The market simply took its cue from these macro data on the likelihood of the Fed’s new QE II program.”

Besides a weakening dollar, other factors curbing investment into the oil market include diminishing incentives to store oil, a seasonal pickup in oil demand as winter approaches, and the exposure to different political risks evidenced by the terrorist attack at the Nigeria capital Lagos on Oct. 2. “However, we believe that record high oil inventories in most regions should prevent price spikes in the short- and medium term,” De Wet said.

(Online Oct. 11, 2010; author’s e-mail: samf@ogjonline.com)

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