Sam Fletcher
Senior Writer
HOUSTON, Nov. 21 -- Crude futures prices jumped to a record closing above $98/bbl Nov. 20 then climbed above $99/bbl in early trading Nov. 21 in the New York market as traders apparently geared up for another run at the $100/bbl threshold.
"Weakness in the dollar spurred oil to close above $98/bbl for the first time yesterday and surpass the $99 level this morning," said analysts in the Houston office of Raymond James & Associates Inc. "Despite an expected increase in crude stocks from today's weekly inventory data release, oil was trading up premarket on expectations of colder weather in the Northeast and supply setbacks in Canada and Mexico."
Also fueling the price spike were reports of a Nov. 18 fire that damaged a 155,000 b/d oil sands upgrader at Royal Dutch Shell PLC's Scotford complex near Edmonton, Alta. Company officials said the upgrader and Shell's adjacent 98,000 b/d refinery were operating at reduced rates Nov. 20. Oil produced by the upgrader is processed through the refinery.
Reduced supplies and increased demand are not the only factors that can drive crude prices higher, of course. The volume of crude traded Nov. 19 on the New York market was "the lowest level of the last 55 trading days," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland, in a Nov. 21 report. "In a low-volume, preholiday market, it would not need much more than a large pension fund implementing an increased asset allocation in commodities to trigger a significant rally. West Texas Intermediate has gained $4.20/bbl in 2 days without any significant new developments in oil fundamentals. On the other hand, the dollar has been under pressure, and liquidity keeps on flowing out of equities."
Raymond James analysts said, "Credit spreads widened following the Federal Reserve's cut in its growth outlook for next year to a growth of only 1.8-2.5%. This, coupled with the US 10-year Treasury yield falling below 4% for the first time since 2005, sunk the dollar to a new record low [of] $1.4850 vs. the euro."
However, analysts at Barclays Capital Research, a division of Barclays Bank PLC, London, claim the valuation of the dollar against other currencies has but limited effect on oil markets. "A widespread misconception is that the value of the dollar and the price of oil are linked by a clear indirect relationship. This belief has grown stronger over the past 3 months fueled by the simultaneous acceleration in the fall of the greenback and the move up in oil prices. In our view, the relationship between the two is far more tenuous that many might think. Firstly, there is no evidence that periods of dollar weakness are associated with higher oil prices, and, historically, a wide range of behavior has been displayed," they reported Nov. 21.
"Arguably, a weaker dollar makes oil cheaper for nondollar consumers, whereas it squeezes profits for non-US producers, which should prove supportive for prices over time," said Barclays analysts. "While the magnitude of the effect is far from clear, its transmission would involve substantial time lags. Refiners are often insulated from fluctuations in the value of the dollar as both their inputs and outputs are denominated in the same currency, and any knock-on effect induced by higher end-user demand would likely be in the region of quarters and years rather than days. On these grounds we see very little substance to those explanations which base the latest move-up in oil prices on the deterioration of the dollar, and by contrast we see the tightening of the physical market balance as having a far better explanatory power."
They predicted, "Severe constraints on the supply side and limited room for maneuver by OPEC in the short term will keep prices vulnerable to supply disruptions and a faster-than-expected erosion of the inventory cover." With the consensus of Wall Street analysts anticipating a build in crude stocks, they said, "The release of the US weekly oil statistics will be the key price-setting force" in Feb. 21 trading.
US inventories
Instead of a consensus increase of 1 million bbl, however, the US Energy Information Administration said Nov. 21 that commercial inventories of benchmark US light, sweet crudes dropped 1.1 million bbl to 195.2 million bbl during the week ended Nov. 16.
Gasoline stocks increased 200,000 bbl to 195.2 million bbl in the same period, below the recent normal range for that time of year. Both finished gasoline inventories and gasoline blending components rose slightly during the latest week. Distillate fuel inventories fell 2.4 million bbl to 131 million bbl. Propane and propylene inventories dipped 400,000 bbl to 61.2 million bbl.
US imports of crude fell by 667,000 b/d to 9.8 million b/d during that same week. Gasoline imports were up slightly to 1.1 million b/d. Distillate fuel imports increased to 267,000 b/d.
Still, the input of crude into US refineries dipped by 151,000 b/d to 14.9 million b/d, with refineries operating at 87% of capacity, down from at 87.7% the prior week. Gasoline increased to 9 million b/d, while distillate fuel production fell to 4.2 million b/d.
Meanwhile, analysts at Barclays Capital Research see little chance that the Organization of Petroleum Exporting Countries will switch from the US dollar to a pricing system based on a basket of currencies. "It would necessitate a major overhaul of the existing pricing system, given that OPEC crudes are currently priced in terms of dollar adjustments from dollar-denominated benchmarks. The absence of non-US dollar alternatives (the only exception being the yen-denominated contracts traded on the Tokyo Commodity Exchange) would therefore require moving away from current market mechanisms and setting up a brand new pricing system, which we believe is unfeasible," they said.
In other news, Jakob reported, "Freight rates from the Persian Gulf have sharply increased over the last 10 days. The challenge for OPEC will be to offer enough supply to answer not only the inflationary pressure from oil demand growth but as well the inflationary pressure from asset allocation growth into commodities. For now OPEC has shown some willingness to answer the former but not yet the latter."
Energy prices
The January contract for benchmark US crudes jumped $3.39 to a record closing of $98.03/bbl Nov. 20 on the New York Mercantile Exchange. During intraday trading, the price climbed as high as the Nov. 7 record of $98.62/bbl. The February contract escalated by $3.31 to $96.89/bbl. On the US spot market, WTI at Cushing, Okla., was up $3.08 to $98.83/bbl. Heating oil for December delivery gained 8.59¢ to $2.69/gal on NYMEX. The December contract for reformulated blend stock for oxygenate blending (RBOB) increased 6.99¢ to $2.45/gal.
The December natural gas contract fell 31¢ to $7.48/MMbtu, "dragging the rest of the winter (January-March contracts) with it," said Barclays Capital analysts. "With no significant cold weather in sight [and] the low demand period of the US 4-day Thanksgiving holiday weekend, gas market prices sustained the strong downward trajectory."
In London, the January IPE contract for North Sea Brent crude escalated by $3.21 to $95.49/bbl. The December gas oil contract shot up $24.50 to $845.75/tonne.
The average price for OPEC's basket of 12 reference crudes gained $1.33 to $90.04/bbl on Nov. 20.
Contact Sam Fletcher at [email protected].
