Quarter ends with bang

April 8, 2008
The fluctuation of crude futures prices on the New York Mercantile Exchange in March ended the first quarter of 2008 with a bang, said Paul Horsnell, Barclays Capital Inc., London.

Sam Fletcher
Senior Writer

The fluctuation of crude futures prices on the New York Mercantile Exchange in March ended the first quarter of 2008 with a bang, said Paul Horsnell, Barclays Capital Inc., London. By Mar. 31, the average price for benchmark US light sweet crudes was $97.82/bbl, "the highest quarterly average ever and $39.60/bbl higher than the first quarter of 2007," Horsnell said.

As a result, nine investment banks increased their forecasts for average 2008 crude prices by $10/bbl or more, including three banks that raised their estimates by at least $20/bbl, in what may be "the largest shift in consensus ever seen in any single month," said Horsnell. "Over the course of the first quarter as a whole, the consensus forecast for the average of West Texas Intermediate in 2008 has shifted up by $14/bbl."

At the start of the quarter, he said, "$100/bbl was something that attracted massive media coverage based on the angle of how exceptionally high a price it was. By the end of the quarter, headlines such as 'Oil prices slump to $100' were becoming commonplace, i.e. $100 has already gone from being seen as high to being seen as a symptom of a weak market."

Tristone Capital Inc., Calgary, raised its oil price estimate to $100/bbl for 2008-09. The company expects forecasts of reduced economic growth to continue to diminish demand for fuel among members of the Organization for Economic Cooperation and Development, setting the stage for rebuilding global inventories in the second and third quarters of 2008. Yet the firm also expects continued demand growth in China and the Middle East to offset the slowdown among OECD countries.

With the US facing recession at a time of record high prices, OECD demand erosion might be more pronounced than envisaged. "With still-rising upstream costs and the inevitable layering of environmental controls, we see $80-90/bbl WTI prices necessary to support the growth in non-OPEC supply," said Tristone Capital analysts.

Positions liquidated
In a 2-week period through Apr. 4, speculators liquidated some 60,000 crude contracts on the New York futures market, partly to cover cash calls following the demise of Bear, Stearns & Co. Inc., the fifth largest US investment bank, said analysts at KBC Process Technology Ltd., Surrey, England.

In early March, the net long speculative position on NYMEX hit a record high of 192,000 contracts, pushing crude futures prices to record levels above $110/bbl. But because of the financial turmoil following Bear Stearns, crude futures prices fell back roughly $10/bbl. The May contract for benchmark US light, sweet crudes jumped by $2.40 to $106.23/bbl Apr. 4 on NYMEX.

KBC analysts said, "As US dollar exchange rates strengthened, speculators rushed to liquidate oil futures length to cover Bear Stearns." They said, "Speculative funds are expected to flow back into oil in April providing strong support to crude futures as continued US economic woes weigh on dollar exchange rates and equities. Also, further tightening in US gasoline stocks will lead to greater investor responses to refinery outages and other bullish headline news."

US gasoline inventories, which reached a 15-year high of 236 million bbl after an unprecedented 18 weeks of consecutive increases, fell by 12 million bbl in March as US refiners reduced runs to 82% of capacity, the lowest level since October 2005 after Hurricanes Katrina and Rita knocked out power and flooded refineries along the Gulf Coast. As a result, US gasoline production had declined by 500,000 b/d to 8.5 million b/d by the end of March.

The Energy Information Administration said commercial US crude inventories jumped 7.4 million bbl to 319.2 million bbl in the week ended Mar. 28. Gasoline inventories fell 4.5 million bbl to 224.7 million bbl in the same week. Distillate fuel stocks dropped 1.6 million bbl to 109.7 million bbl. NYMEX speculators focused their attention on the gasoline draw. "There is still a 22 million bbl year-on-year excess in US gasoline stocks, offset by shortfalls in crude (minus 11 million bbl) and distillate fuel (minus 10 million bbl)," said KBC analysts. "On balance, overall US oil stocks are more than adequate given an underlying drop in total demand of around 500,000 b/d. However, until stocks rise high enough to dampen the impact of headline news, speculators will be selective in their responses. Gasoline stocks will continue to be drawn down quite rapidly in the weeks ahead, providing support to speculative length."

(Online Apr. 8, 2008; author's e-mail: [email protected])