MARKET WATCH: Oil tops $140/bbl as US dollar falls

Sam Fletcher
Senior Writer

HOUSTON, June 27 -- The front-month crude contract in intraday trading jumped above $140/bbl for the first time June 26 in the New York futures market, boosted by the falling value of the US dollar after the Federal Reserve Bank said it would maintain its current 2% interest rate.

"Despite US efforts to curb speculation in energy futures markets, oil reached a new record of $140/bbl yesterday and $142/bbl pre-market [June 27] on fears of Libya cutting output," said analysts in the Houston office of Raymond James & Associates Inc. Libya's oil minister reiterated that country may reduce its crude production this year.

Inflation fears continue to spur the market. On June 26, the dollar fell against most major currencies, and gold registered its biggest 1-day change in 23 years, escalating $33.10 to $913.10/oz. Commodities like oil and gold that are priced in dollars become more attractive to holders of other currencies as the dollar weakens. "When money has nowhere to go, it is parked into commodities as it is one of the few investment instruments that actually rises the more money you pour into it," said Olivier Jakob at Petromatrix, Zug, Switzerland. "For oil and commodities in general the problem remains that the commodity markets are too small to absorb these exogenous flows and especially some of the market orders that would not be expected in a low liquidity environment."

Analysts with Barclays Capital Inc., London, reported, "While assets under management in commodity exchange-traded products have continued to grow, net inflows of new investments have slowed markedly. Full data for the second quarter shows that inflows into European commodity products are less than half their levels of the first quarter. Moreover, in some major markets, there have been net outflows of funds, with energy being the most notable example."

Meanwhile, Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said oil prices might climb to $170/bbl in coming months.

Energy prices
The August contract for benchmark US light, sweet crudes hit a record high of $140.39/bbl, up from the day's low of $133.68/bbl in intraday trading June 26 on the New York Mercantile Exchange. It settled at a record closing price of $139.64/bbl, up $5.09 for the day. "Despite huge intraday swings, oil prices have generally been in a holding pattern over the past 3 weeks, consolidating in the low-to-mid-$130/bbl," Barclays Capital analysts said.

The September crude contract gained $5.08 to $140.16/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $5.65 to $139.65/bbl. The July contract for reformulated blend stock for oxygenate blending (RBOB) increased 11.72¢ to $3.51/gal on NYMEX. Heating oil for the same month climbed 13.42¢ to $3.88/gal. Barclays Capital analysts maintain "a bearish bias" towards distillates. "The combination of larger-than-normal stock builds in the US and softer jet fuel demand suggests further modest downside in distillates cracks," they said.

The July natural gas contract escalated 35.2¢ to $13.11/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., dropped 7¢ to $12.70/MMbtu.

In London, the August IPE contract for North Sea Brent crude climbed even higher than August WTI on NYMEX, up $5.50 to $139.83/bbl. The July gas oil contract shot up $47.50 to $1,253.75/tonne.

The average price for OPEC's basket of 13 reference crudes increased 90¢ to $130.77/bbl June 26.

Contact Sam Fletcher at samf@ogjonline.com.