MARKET WATCH: Weak dollar triggers energy price jumps

In one of the biggest single-day price moves in its history, crude futures prices shot up more than $5/bbl June 5, wiping out earlier losses this week in the New York market.

Jun 6th, 2008

Sam Fletcher
Senior Writer

HOUSTON, June 6 -- In one of the biggest single-day price moves in its history, crude futures prices shot up more than $5/bbl June 5, wiping out earlier losses this week in the New York market.

The earlier sell-off of energy commodities suddenly reversed as the euro escalated against the US dollar after Jean-Claude Trichet, president of the European Central Bank, said the bank might raise its interest rates. The weak dollar has for months encouraged investments in crude and gold markets as a hedge against inflation. Energy prices continued to soar during early trading June 6.

"West Texas crude prices have climbed back to the $130/bbl mark less than 48 hr after plunging to $122 in one of the biggest single-day price drops of 2008," said analysts June 6 at Pritchard Capital Partners LLC, New Orleans.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Oil fundamentals had recently started to reassert themselves with worries about demand destruction, but Trichet chased them away and reinvited financials to the party. The underlying oil fundamentals are, however, unchanged. There was no supply news yesterday, and yesterday's commodity surge at multiples of the dollar fall will only squeeze further the budgets of subsidized emerging countries, overall inflation will increase, more airlines will be forced to capitulation, etc."

Meanwhile, political pressure on the US Commodity Futures Trading Commission and futures markets continued to build. US Rep. Bart Stupak (D-Mich.) charged the largest US trading houses have been manipulating energy futures markets, although a government investigation has not uncovered any illegal activity. The investment banks denied those charges. Stupak chairs the subcommittee on oversight and investigations under the House energy committee.

Jakob said Stupak's charge "was purely a public relation exercise to sponsor his antispeculation bill, but the risk from all this agitation from lawmakers is still to push for a CFTC reclassification of 'speculators' as well as a change of policy on limit waivers." Jakob said, "Perversely, this might push some pension funds to buy before they are potentially not allowed to do it anymore, and we continue to witness an increase in the California Public Employees' Retirement System's [one of the largest US institutional investors] allocation to inflation assets since the pressure on the CFTC started to develop. Meantime banks buying commodities will state that they are not speculating but simply hedging Trichet."

Earlier this week, George Soros, a financial speculator, testified before the US Senate Committee on Commerce, Science, and Transportation, about the impact of financial "bubbles" on oil markets after first warning senators, "I am not an expert in oil markets." Soros is best known "breaking the Bank of England" on "Black Wednesday" in 1992 when he sold short some $10 billion in English pounds after the bank failed to raise its interest rates to the level of other European Exchange Rate Mechanism countries or to float its currency. The bank was forced to devalue the pound sterling, and Soros made an estimated $1.1 billion on his transactions.

Paul Horsnell, Barclays Capital Inc., London, said, "Congress must now be close to running out of room to conduct commodity bubble hearings. At the current rate of growth, a quick calculation reveals that by the end of the year, 2 out of 3 Americans will have given congressional testimony about commodities bubbles."

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "The CFTC has analyzed the role of investors (both hedgers and speculators) and concluded that there is little economic evidence to demonstrate that prices are being systematically driven by speculators. We believe the biggest distortion in the oil market is the widespread use of fuel subsidies in a number of emerging market countries."

However, Horsnell said, "Economic growth and not low prices are the key drivers of oil demand growth in Asia. Indeed, gasoline prices in New Delhi were higher than the US average even before the latest price increases."

Energy prices
The July contract for benchmark US light, sweet crudes jumped by $5.49 to $127.79/bbl June 5 on the New York Mercantile Exchange. The August contract gained $5.50 to $128.18/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up $5.49 to $127.79/bbl. heating oil for July delivery increased 13.5¢ to $3.68/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB) escalated 13.94¢ to $3.33/gal.

The July natural gas contract gained 14¢ to $12.52/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., shot up 25¢ to $12.47/MMbtu.

In London, the July IPE contract for North Sea Brent crude increased $5.44 to $127.54/bbl. Gas oil for June gained $7.25 to $1,153.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes increased 21¢ to $118.77/bbl on June 5.

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