MARKET WATCH: Crude explores new highs near $110/bbl

March 11, 2008
Crude futures rebounded, soaring above $108/bbl in intraday trading Mar. 10 on the New York Mercantile Exchange, despite a falloff in equity markets.

Sam Fletcher
Senior Writer

HOUSTON, Mar. 11 -- Crude futures rebounded, soaring above $108/bbl in intraday trading Mar. 10 on the New York Mercantile Exchange, despite a falloff in equity markets.

"The liquid commodity has become the liquidity commodity," said Olivier Jakob at Petromatrix, Zug, Switzerland. "Despite the dollar index being stable for the last 2 days and equities making new lows, West Texas Intermediate still managed to break through all attempts of [price] resistance."

New York-based Goldman Sachs Group Inc., the world's largest securities firm, notified clients on Mar. 10 that a cut in interest rates by the Federal Reserve Bank was likely. "That is about the only supportive factor we could find [for the latest price spike] but [Goldman Sachs analysts] reversed their positions later in the day to not expecting an emergency cut before the Fed's [next] meeting," said Jakob.

The front-month crude contract continued climbing to a record $109.72/bbl in overnight electronic trading on NYMEX but was reported trading below $107/bbl in the Mar. 11 morning session. Meanwhile, the US dollar fell to a new low against the euro that was trading at a record $1.55. The dollar's decline stalled, however, when the Fed announced plans to lend $200 billion in Treasury securities to primary dealers, secured for 28 days rather than overnight as is usual. That would allow bond market participants to exchange mortgage-backed securities for the marketable Treasury securities. The Fed also authorized increases in its temporary reciprocal currency arrangements with the European Central Bank and the Swiss National Bank, generating more cash for financial markets.

"It seems to us that $100/bbl oil is starting to step out to wider acceptance," said Paul Horsnell at Barclays Capital Inc., London. "Within just about 5 years, $40/bbl has gone in mainstream perception from being thought of as ludicrously high to being thought of as ludicrously low." The price of $50/bbl "has followed the same progression, and so perhaps now has $60[/bbl] oil," he said.

"In our view, the definition of high and low crude oil prices is a function of the position of the back of the curve," Horsnell said. "When long-term prices were $20/bbl, then $40/bbl was a high price and representative of a tight market. When long-term prices are $100/bbl, then $90/bbl would be low and representative of a weak short-term market. The long-term price is driven in our view by the perception of longer-term imbalances, and concerns that an insufficient investment signal has so far been given to bring long-term demand and capacity growth into line."

Horsnell said, "We see the current Wall Street consensus average forecast for WTI in 2008 of $84/bbl as being far too low, and we would continue to stress that our own $97.70/bbl forecast is distinctly conservative in its assumptions."

In its Oil Market Report issued Mar. 11, the International Energy Agency in Paris reduced its global demand forecast for 2008 by 80,000 b/d to 87.5 million b/d for a 2% annual growth rate. IEA reported crude supplies from the Organization of Petroleum Exporting Countries fell 120,000 b/d to 32.1 million b/d in February. Middle East Gulf and West African production was down 300,000 b/d, offset by a 150,000 b/d increase in Iraqi supply.

Energy prices
The April contract for benchmark US sweet, light crudes set an intraday high of $108.21/bbl in regular trading Mar. 10 on NYMEX before closing at a record $107.90/bbl, up $2.75 for the day. The May contract gained $2.46 to $106.74/bbl. On the US spot market, WTI at Cushing, Okla., was up $2.74 to $107.90. Heating oil for April rebounded by 2.64¢ to $2.97/gal, wiping out the previous day's loss. The April contract for reformulated blend stock for oxygenate blending (RBOB) continued climbing, up 2.06¢ to $2.71/gal.

The April natural gas contract also continued its advance, leaping 25.5¢ to $10.02/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., fell 24.5¢ to $9.58/MMbtu.

In London, the April IPE contract for North Sea Brent crude escalated by $1.78 to $104.16/bbl. The March gas oil contract gained $4.50 to $977/tonne.

The average price for OPEC's basket of 13 reference crudes increased 48¢ to $99.48/bbl on Mar. 10. OPEC officials said Mar. 11 that Ecuador's Oriente crude is now included in the OPEC basket price, effective Oct. 19, 2007.

Contact Sam Fletcher at [email protected].