MARKET WATCH: Crude tops $143/bbl; likely will head higher

The front-month crude contract climbed above $143/bbl for the first time in early electronic trading June 30 after setting a new record in the regular trading session June 27 in the New York market.

Sam Fletcher
Senior Writer

HOUSTON, June 30 -- The front-month crude contract climbed above $143/bbl for the first time in early electronic trading June 30 after setting a new record in the regular trading session June 27 in the New York market.

Propelling the increase were the usual concerns: the weak US dollar and potential threats to global production vs. fear that inflation may yet reduce demand growth. "With the abysmal year-to-date performance of the broader market indices combined with the weakening US dollar, investors continued to put their money to work in commodities last week, driving natural gas and oil higher," said analysts in the Houston office of Raymond James & Associates Inc. "Oil is now poised to have its biggest 6-month gain on a percentage basis since 1999. Premarket [on June 30], oil is maintaining its bullish upward trajectory as traders focus on escalating tensions in Iran and worries over increased worldwide demand."

Policy, price outlooks
Paul Horsnell, Barclays Capital Inc., London, said, "The oil market seems to have entered something of a twilight zone, in which strands of time have become jumbled. In general, policies seem to be seeping out from the past, while price signals are a stark warning from the future that energy supply and demand are on an unsustainable path."

Horsnell said: "The policy debate in response to higher energy prices in many consumer governments seems to have been drawn straight from the 1970s. In addition, a growing climate of blame shifting and accusation within the Washington beltway seems in some ways to invoke some more distant echoes from the 1950s. Likewise, geopolitical influences on the oil market and the policy choices involved, particularly in regard to key Middle East producers, could be seen as harking back to the 1970s in terms of rhetoric and to the 1950s in terms of intent. Across the Organization for Economic Cooperation and Development, the slow movement of decades towards the greater acceptance of less governmental intervention in energy is now facing a challenge. Indeed, while the market mechanism is signaling the need for some significant structural shifts in the dynamics of both supply and demand, the immediate political response has often been the old but expedient one of considering steps to dampen or remove those signals."

Meanwhile, Horsnell said, "The market has produced a structural shift in relative prices, putting some of the longer-term signals for adjustment firmly into play today. The market is doing precisely what it should do, in creating incentives to do things today that will smooth the transition to the future. However, our fear is that policymakers seem to be considering actions that are intended to drag the market into the past, and that this will make the passage into the future more traumatic."

Horsnell predicted, "The price highs for the year are still not in. However, it does appear to us that at least the pace of increase is likely to moderate somewhat, albeit within a fairly wide trading range. We see little chance of a sustained move in prices back below $100/bbl, with some severe upside risks being primarily geopolitical in nature, while the main downside is perhaps one in which policy falls back too far into the past, creating distortions in the present and starker imbalances in the future."

Raymond James analysts said the imbalance of increasing demand for energy and constrained supplies "is not something that governments, no matter how powerful, can eliminate, though it is something that they can, and in fact often do, make worse through short-sighted energy policy." Therefore, they said, "We don't see the 2008 US election as a game-changing event for the US oil and gas markets, regardless of who wins. Even the centerpiece of both McCain's and Obama's energy platforms—binding carbon emissions caps—is not something that will impact the fundamentals of the oil and gas industry anytime soon."

Raymond James analysts describe Sen. John McCain of Arizona, the presumed Republican nominee for president, as "considerably more receptive" to conventional oil gas operations than Sen. Barack Obama of Illinois, the apparent Democrat nominee. But McCain "is by no means a cheerleader for Big Oil," they said. "McCain and Obama have both positioned themselves as green candidates, and we believe that both would ultimately be positive for most forms of alternative energy."

Raymond James analysts reported, "Both support a substantial increase in federal leadership on climate change and renewables, and the election of either candidate would bring US policy closer to that of Europe."

Energy prices
The August contract for benchmark US light, sweet crudes hit yet another record high in regular intraday trading, peaking at $142.99/bbl June 27 before closing at a record $140.21/bbl, up 57¢ for the day on the New York Mercantile Exchange. The September contract gained 59¢ to $143.99/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 56¢ to $140.21/bbl. Heating oil for July increased by 2.32¢ to $3.91/gal on NYMEX. The July contract for reformulated blend stock for oxygenate blending (RBOB), however, dropped 1.01¢ to $3.50/gal.

The August natural gas contract lost 5¢ to $13.20/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., advanced by 3.85¢ to $13.08/MMbtu.

In London, the August IPE contract for North Sea Brent crude increased 48¢ to $140.31/bbl. The July gas oil contract gained $13 to $1,266.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes jumped $5 to $135.31/bbl on June 27.

Contact Sam Fletcher at samf@ogjonline.com.

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