OGJ Senior Writer
Crude oil prices hit their highest peaks so far this year in early December, with West Texas Intermediate at a 25-month high and North Sea Brent above the “psychologically important” $90/bbl.
“The $90/bbl level is important because many…believe that economic growth could start to suffer if prices rise much above this,” said analysts at KBC Energy Economics, a division KBC Advanced Technologies PLC in Surrey, UK.
“More dramatically,” said James Zhang at Standard New York Securities Inc., the Standard Bank Group., and “both WTI and Brent flipped rather decisively from contango to backwardation. Cracks of both gasoline and gas oil strengthened, while fuel oil cracks weakened.”
Backwardation is a market structure where later oil futures contracts are priced progressively lower than the front-month contract, “which makes it more expensive to hold physical stocks of oil,” KBC analysts said. This means the balance of the immediate supply-demand fundamentals has shifted decisively in favor of the bulls. Although not yet reflected in a premium for physical Brent above the forward contracts, the backwardation suggests stocks are starting to tighten in earnest and that market perceptions now reflect that, KBC said.
Fed spending failing?
On a TV news program in early December, Federal Reserve Chairman Ben Bernanke acknowledged the US economy is still fragile and may take 4-5 years for unemployment, now at 9.8%, to return to 5-6%. He said further Fed monetary input is possible.
That came just days after reports US payrolls increased less-than-expected in November, and the jobless rate unexpectedly rose to 9.8%. The immediate reaction was an aggressive sell-off of the US dollar due to the “failed policy of the Fed,” said Olivier Jakob at Petromatrix, Zug, Switzerland. Lack of success in the first two phases of the Fed’s quantitative easing program (QE1 and QE2) “can only be hidden with doubling up, i.e. QE3, QE4, etc,” he said.
“Bernanke has stated that he does not care about commodity inflation, but when the input costs are increasing and the economy is still a question mark, one way to improve returns is still to keep employment at the minimal level. Productivity is increasing to maintain the margins, but at the expense of job creation,” said Jakob. Since the start of the Fed’s QE program, he said, “There has been a 17% increase in the Standard & Poor’s 500 index, but no increase of trading volume; an increase of unemployment; and a 23% increase in the price of gasoline.”
Jakob said, “The challenge for the Fed will now be to find support for its action starting Jan. 1 when the Republicans and the Tea Party take over Capitol Hill.”
The 2010 hurricane season for the Gulf of Mexico earlier was forecast to be the worst since 2005 when Katrina and Rita devastated Gulf Coast oil and gas operations. Instead, it proved be one of the mildest seasons in many years.
However, KBC analysts reported, “We have said before that it will take a new Ice Age to whittle down the distillate overhang in the US and Europe, and it looks like that’s just what we may be getting.”
Heavy snow and freezing weather already has hit northern Europe much earlier than usual, prompting demand for heating oil in the main consuming regions. Meanwhile, US heating oil stocks have plunged from their autumn peaks, adding to the tightness in middle distillates prompted by the recent heavy Chinese buying.
“Although meteorologists concur that this winter is likely to be unusually cold, there is no consensus over quite how cold it will get,” KBC analysts said. But they noted, “Flying in the face of global warming scenarios, Polish weather forecasters have predicted this winter will be the coldest in 1,000 years because the warming flows of the Gulf Stream have diminished. If the trend continues, they say, most of Europe will become a permafrost area.”
(Online Dec. 6, 2010; author’s e-mail: firstname.lastname@example.org)