MARKET WATCH: Crude prices edge higher in New York, London

Crude prices continued to climb but at a slower rate May 8, having increased $11.17/bbl or 9.9% since the rally began May 1.

May 9th, 2008

Sam Fletcher
Senior Writer

HOUSTON, May 9 -- Crude prices continued to climb but at a slower rate May 8, having increased $11.17/bbl or 9.9% since the rally began May 1.

However, market activity was "going strong again," above $125/bbl in early trading May 9. "Crude is benefiting from renewed Nigerian militant attacks, which have severely limited Nigerian production. (April's output was the lowest in a decade)," said analysts in the Houston office of Raymond James & Associates Inc.

Many analysts attributed the surge in oil prices since the first of the year to the general weakness of the US dollar against other key currencies and the large amount of speculative funds that have been invested instead into the commodities market.

However, Adam Sieminski, chief energy economist for Deutsche Bank, said, "The oil price has continued to rally in the face of a stronger US dollar and confirms to us that this relationship was always built on shaky foundations. We do not see any signs yet that non-OECD [Organization for Economic Cooperation and Development] oil demand is suffering from the rise in oil prices. On our various measures, oil prices would need to rise above $150/bbl to be considered extreme."

Goldman Sachs Group Inc., the world's largest securities firm, predicted this week that crude costs could escalate to $150-200/bbl within 2 years (OGJ Online, May 6, 2008). In 1985, a team of Goldman Sachs analysts forecast a "super spike" of crude prices to $50-105/bbl at some point within a few years because of continued unexpected strength in world oil demand and economic growth, especially in the US and China.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Crude oil is currently held up in a tug-of-war between the Goldman reality and the physical reality. Even though the world economy has not yet proven that it was able to cope with the first super spike (on a dollar-adjusted basis we are only starting to approach the $105/bbl of the first Goldman super spike), it still makes a great story to support pension funds piling more into commodities."

However, Sieminski noted, "Since 2002 and the beginning of the boom in commodity prices, it has become increasingly fashionable to blame a large part of this rise on the speculative community. While we agree that disconnects between price and underlying physical fundamentals can occur due to investor flows, we believe that such anomalies cannot persist for long and that underlying fundamentals remain the ultimate drivers of commodity prices, forward curves, and volatility."

Moreover, he said, "The rally in nonexchange traded commodity prices, such as molybdenum, cadmium, and ferrochrome, since the end of 2002 has been similar if not greater in magnitude than the rally in exchange traded commodities, such as crude oil and copper, where speculative inflows are possible." Sieminski said, "We believe this refutes the claim that speculators have been the primary drivers of rising commodity prices during this cycle. Rather it may be an indication of the increasing pricing power that resides with commodity producing companies and countries."

Still, said Sieminski, "Investor flows and commodity fundamentals can diverge from time to time. Indeed the speculative community's aggressive net short position in US natural gas may be partly responsible for artificially depressing natural gas prices. On our reckoning, US natural gas prices need to rise another 35% to bring them into line with the rest of the energy complex."

Energy prices
The June contract for benchmark US light, sweet crudes inched up 16¢ to a record $123.69/bbl May 8 on the New York Mercantile Exchange, then jumped to an intraday high of $124.61/bbl in electronic trading after the floor session closed. The July contract gained 41¢ to $123.61/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 17¢ to $123.70/bbl. Heating oil for June delivery climbed by 6.25¢ to a record $3.51/gal on NYMEX. The June contract for reformulated blend stock for oxygenate blending (RBOB) increased by 1.96¢ to a new high of $3.14/gal.

The June natural gas contract, however, dropped 6.4¢ to $11.26/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., climbed by 24.5¢ to $11.32/MMbtu. "US natural gas prices is one of the top performing commodities so far this year," Sieminski said. "More upside is probable in our view, not least since this market continues to trade cheaply vs. the rest of the energy complex. We believe one risk to this bullish assessment is the possibility of a cooler summer."

In London, the June IPE contract for North Sea Brent crude increased 52¢ to $122.84/bbl. Gas oil for May delivery jumped $30.25 to a record $1,153.75/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 13 reference crudes gained 90¢ to $116.93/bbl on May 8.

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