MARKET WATCH: Crude price climbs to year-long highs

Sam Fletcher
OGJ Senior Writer

HOUSTON, Oct. 19 -- Crude continued climbing Oct. 16 for the seventh consecutive trading session to set new 1-year highs above $78/bbl on the New York market.

Markets were optimistic last week despite rising unemployment as US retail sales exceeded expectations, except for autos, and the Dow Jones Industrial Average topped the 10,000 mark for the first in more than a year.
In Houston, analysts with Raymond James & Associates Inc. said, “Crude's rally above its 5-month trading range of $65-75/bbl seems to have been largely fueled by speculation of strengthening demand, the dollar's sharp decline since the start of October, and a recent rally in the equity markets. Bringing fundamental support to the oil rally is news that Angola's crude exports are forecast to decline by 30,000 b/d in December, aligning the country closer to its OPEC production quota.” They reported crude and natural gas prices were flat in early trading Oct. 19.

In New Orleans, analysts at Pritchard Capital Partners LLC said, “We expect the momentum in crude to continue and expect crude to test the $80/bbl level at some point [soon]. The only factor that could reverse the crude rally would be dollar strength, but other than an oversold bounce or direct intervention by the central banks, it is difficult to come up with a reason for the dollar to rally.”

The market’s mood is “so much noticeably brighter,” said analysts at KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, that one might think “the global credit crunch was little more than a bad dream.” They warned, however, “Much of the current positive economic momentum is being driven by artificially low interest rates and the massive fiscal stimuli measures that are currently pumping through the system.” They cautioned, “The serious downside risks should not be ignored.”

KBC analysts see three potential “doomsday” scenarios:
-- The continued rise in developed world unemployment and spare capacity levels triggers a Japanese-style deflationary spiral, delaying consumption patterns to such an extent that the global economy crashes to an even lower depth than seen in 2009.
-- The recovering global economy reawakens inflation and the need for higher interest rates, which would in turn make servicing the massively inflated debt levels unmanageable, triggering a further downslide in the global economy.
-- The global economy simply remains in dire straights, revealing the current upturn to be illusory.

In other words, the bear market may be “simply dozing rather than hibernating,” said KBC analysts. “Although we assume as our base case that the global economy, and hence oil demand, continues to recover through 2010, a high probability remains on the downside risks (30%).”

Analysts at the Centre for Global Energy Studies (CGES), London, reported, “Two extreme schools of thought offer widely different views of the action that governments will need to take in the coming months. On the one hand, it is argued that recovery is due almost entirely to the massive government stimulus packages around the world and that these programs need to be maintained to avoid the possibility of a ‘double-dip’ recession.

“At the other extreme, it is argued that the sheer size of these fiscal boosts has already begun to create the next asset price bubble, and governments need to bring them to a swift end. Both sides can point to evidence that supports their point of view. Governments will need to decide on a clear course of action; the one thing that they cannot do is to wind down their stimulus programs by stealth,” they said.

Energy prices
The November contract for benchmark US light, sweet crudes climbed 95¢ to $78.53/bbl Oct. 16 on the New York Mercantile Exchange. The December contract gained 94¢ to $79.02/bbl. On the US spot market, West Texas Intermediate at Cushing, Okla., was up 95¢ to $78.53. Heating oil for November delivery increased 1.16¢ to $2.03/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month escalated 3.44¢ to $1.98/gal.

The November natural gas contract continued to climb, up 29.9¢ to $4.78/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 9¢ to $3.95/MMbtu. Like oil, natural gas gained last week from the jump in US industrial production.

“Any increase in industrial activity would imply greater demand for natural gas from the industrial sectors within the economy; industrial demand for natural gas is down 12-15% from the peak,” said Pritchard Capital Partners. “However, to get through the $5/Mcf resistance level, the market will probably need to see lower storage injections—the past two weekly storage injections reported by the Energy Information Administration have been more than 10% above the forecasts.”

In London, the December IPE contract for North Sea Brent crude was up 76¢ to $76.99/bbl. Gas oil for November gained $9.25 to $625.25/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased $1.69 to $74.89/bbl on Oct. 16. So far this year, OPEC’s basket price has averaged $57.36/bbl.

Contact Sam Fletcher at samf@ogjonline.com