MARKET WATCH: Weak dollar fuels energy price rise

March 14, 2008
With traders still clocking the falling value of the US dollar, crude futures prices climbed to new intraday and closing highs in both the New York and London markets.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 14 -- With traders still clocking the falling value of the US dollar, crude futures prices climbed to new intraday and closing highs in both the New York and London markets.

"It seems as if the only relevant fundamental item to traders is the weak US dollar," said analysts in the Houston office of Raymond James & Associates Inc. "The technical analysts may look like geniuses right now, but we still expect [oil and gas] commodities to head back to reality in the near term."

At Petromatrix, Zug, Switzerland, Olivier Jakob said, "While the focus is on the dollar, there has been an extraordinary destruction of oil economics." The spread between gasoline and heating oil "has fallen by more than $6/bbl and is down to unprecedented levels," he said. "The liquidation on that spread is very severe. It had started already in early March but was followed by some buying for its 'cheap' value to previous years. Yesterday, however, saw another wave of liquidation, and we can not say if the liquidation is yet over and done."

Meanwhile, Adam Sieminski, chief energy economist for Deutsche Bank in New York, and Michael Lewis, the bank's head of global commodities research in London, issued a report outlining several measures to assess at what point oil prices can be considered extreme. "Although oil demand side fundamentals are deteriorating, we expect the oil price will be captivated by a collapsing US dollar, a relationship we hold with deep suspicion. A further 4% decline in the US dollar index would imply oil prices hitting $120/bbl," Sieminski said. Among those measures:

-- Crude prices are already at record highs in real terms deflated by US producer prices. However, oil prices would have to rise to $118/bbl to exceed their all-time highs in real terms deflated by US consumer prices.

-- Relative to per capita income, crude prices would have to reach $134/bbl to bring the purchasing power of an average G7 (group of seven industrialized nations: Canada, France, Germany, Italy, Japan, UK, and US) consumer to the levels that prevailed in 1981.

-- West Texas Intermediate prices would have to rise to $150/bbl for oil as a percent of global gross domestic product to hit the all-time high that prevailed in 1980.

-- Crude prices would have to hit $145/bbl to raise energy expenditures as a percent of US disposable income to early 1980s levels.

Ethanol outlook
In a separate report, Sieminski said, "We believe population growth, rising incomes, and increased ethanol production will lead to a doubling in grains demand by 2050." But the major benefactor of that market will be Brazil and probably would require further encroachment on its rain forests. Brazil, Sieminski said, "is the only country in the world that combines 20% of the world's unused arable land, weather patterns which allow two annual harvests, political stability, and close proximity to US markets."

Sieminski said, "The US government has made a key strategic decision to increase the relevance of ethanol in its energy matrix over the next decade. We forecast that global soft grain demand for ethanol production should reach approximately 350 million tonnes by 2010 and 675 million tonnes by 2030. These figures are based on our calculations that US ethanol consumption will reach 13 billion gal by 2010 and 24 billion gal by 2030." Sieminski added, "We estimate that 26% of total growth in soft grains consumption between 2005 and 2050 will be driven by ethanol."

Sieminski said, "We believe that there is plenty of unused arable land available for agricultural purposes. We find that the world has approximately 4 billion hectares of potential arable land, of which 1.6 billion hectares was being used in 2005. If we factor in the increase in global soft grain demand coupled with stable crop yields going forward—an aggressive assumption as yields are likely to continue to rise—the amount of available arable land could decrease to just 600 million hectares by 2050."

Energy prices
The April contract for benchmark US light, sweet crudes hit an intraday record of $111/bbl Mar. 13 before closing at $110.33/bbl, up 41¢ for the day on the New York Mercantile Exchange. The May contact climbed 60¢ to $109.17/bbl. On the US spot market, WTI at Cushing, Okla., was up 40¢ to $110.33/bbl. Heating oil for April delivery jumped by 10.04¢ to $3.12/gal on NYMEX. However, the April contract for reformulated blend stock for oxygenate blending (RBOB) dropped 4.58¢ to $2.68/gal.

The April natural gas contract jumped by 21.9¢ to a high of $10.32/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 8.5¢ to $9.79/MMbtu. Sieminski said, "Open interest in the US natural gas futures contract has been climbing along with natural gas prices. However, the still very high speculative short position could create significant financial dislocations if, as we expect, natural gas prices continue to rise."

In London, the April IPE contract for North Sea Brent crude increased $1.27 to $107.54/bbl. The April gas oil contract shot up $20.75 to $977.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes escalated by $1.01 to $1.02.39/bbl on Mar. 13.

Contact Sam Fletcher at [email protected].