MARKET WATCH: Dollar continues to influence oil prices

Sam Fletcher
Senior Writer

HOUSTON, June 16 -- A strengthening US dollar undercut energy prices June 13 despite talk of yet another hike in Saudi Arabia crude production for a total increase of as much as 500,000 b/d in July.

Saudi officials previously had promised to increase production by 300,000 b/d in July. However, Saudi representatives indicated to United Nations officials last week that they might increase output by another 200,000 b/d.

Crude prices were down in early trading June 16 before jumping more than $3/bbl as the dollar again slumped after the New York Federal Reserve reported manufacturing in New York state contracted in June, the fourth decline in the last 5 months.

"Oil rebounded above $135/bbl [June 16] as doubts were expressed on Saudi Arabia's ability to boost production enough to bring prices down," said analysts at Pritchard Capital Partners LLC, New Orleans.

However, analysts in the Houston office of Raymond James & Associates Inc. said: "While the dollar may impact crude's day-to-day trading, its long-term impact is minimal at best. As a global commodity, the price of oil is determined by global supply-demand dynamics. While the depreciation of the dollar makes oil commensurately cheaper for the rest of the world, drivers of demand growth are relatively price-inelastic.

"Countries like China, India, and the Middle East have massive subsidies that insulate consumers from rising prices. As such, a stronger or weaker dollar will have no effect on these consumers, who are driving all of the incremental crude demand. Moreover, a strong dollar cannot solve non-OPEC supply woes, defuse the Middle Eastern geopolitical risk premium, or reinflate OPEC's excess supply bubble. Over the long run, crude and the US dollar are simply driven by different variables and have no lasting relationship. Thus, even if the dollar begins to strengthen, it is not a certainty that oil prices will pull back," the analysts said.

Meanwhile, Friedman, Billings, Ramsey & Co. Inc., Arlington, Va., is raising its 2008 price forecast for West Texas Intermediate to $115/bbl from $90/bbl and is hiking its 2009 outlook to $110/bbl from $85/bbl "to better reflect current market prices and our expectations for a slow, but deliberate, return to more normalized levels over the next few years," said analyst Eitan Bernstein. He said, "Our new crude oil price forecasts are about 25% above consensus expectations, but well below the current spot price and [New York] futures. Crude oil prices have averaged $121/bbl so far this quarter. Given that the second quarter consensus expectation is currently only $100/bbl, we expect many positive revisions over the next few weeks."

Bernstein said, "WTI has risen from a low of $87/bbl in early February to a high of $138/bbl on June 6 and, more importantly, appears to have found support above $120/bbl. Many factors have been cited as contributing to this rally, but we believe it fundamentally boils down to the fact that commodity prices tend to run when there are concerns about the adequacy of future supply. This is amplified for crude oil because of its essential role (gasoline, diesel, jet fuel, heating oil) in driving the world's growth and the lack of real substitutes. However, these high prices are negatively impacting global demand growth."

In the interim, Raymond James analysts noted, "News that a rig fire has shut in production from a Norwegian oil field is providing support to prices."

Energy prices
The July contract for benchmark US light, sweet crudes dropped $1.88 to $134.86/bbl June 13 on the New York Mercantile Exchange. The August contract lost $1.91 to $135.47/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was down $1.87 to $134.87/bbl. Heating oil for July fell 10.59¢ to $3.84/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) lost 6.34¢ to $3.46/gal.

The July natural gas contract dropped 17.3¢ to $12.63/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., was down 7.5¢ to $12.50/MMbtu. Pritchard Capital analysts reported, "July natural gas futures slumped Friday as forecasts called for moderate temperatures to envelop eastern and Midwest energy markets. A weaker petroleum complex also tugged prices lower."

More gas is returning to market. Since its June 3 restart, the offshore Independence Hub has ramped up gas production to 720 MMcfd and "will flow near the high-800s this week," said Raymond James analysts.

In London, the July IPE contract for North Sea Brent crude retreated by $1.84 to $134.25/bbl. The July gas oil contract increased by $5.50 to $1,247.75/tonne, however.

The average price for OPEC's basket of 13 reference crudes gained 75¢ to $130.52/bbl. So far this year, OPEC's basket price has averaged $102.77/bbl up from a previous record average of $69.08/bbl for all of 2007.

Contact Sam Fletcher at [email protected].