More of the same
Oil prices have this week eased by some $10 a barrel from last week's highs around the $110/b level, but appear to have found solid support at $100/b. And there is a greater chance of a move to the upside than to the downside.
US light crude for May delivery was up by $0.60/b on Wednesday, at $101.82/b, while Brent futures were up by $0.51/b, at $101.11/b. Over the coming weeks, many analysts expect further oil-price inflation – probably back to $110/b. And, at some stage this year, they may add another $10-15/b on top of that.
The main bearish consideration is the US' slow-down, but this is already factored into prices and, unless there is a substantial deterioration in the global macro-economic outlook, there seems little likelihood of a significant downside shift.
The bullish elements, meanwhile, remain in place: principal among them is the falling dollar. According to Daniel Yergin, chairman of Cambridge Energy Research Associates (Cera), a consultancy, oil has become the new gold – a financial asset in which investors seek refuge as inflation rises and the dollar weakens. "The credit crisis has been fuelling the flight to oil and other commodities, and that will last until the dollar strengthens or the recession becomes more pronounced," he claims. Cera has identified $120/b as a possible level for oil prices later this year.
Meanwhile, continued robust oil demand in Asia and the likely resurgence of concerns about steady oil flows because of adverse geopolitical circumstances are also likely to continue to buoy prices. Stephen Schork, editor of the Schork Report, predicts that when the bears give up what he sees as probably futile attempts to sell the oil price down below $100/b, prices will rebound to the $110/b level – and perhaps higher. He suggests that $120-125/b oil may be possible before the end of the year.
In addition, Schork notes, the US gasoline market has, in recent trading sessions, shifted from well-defined contango (where futures prices are greater than spot prices) to steep backwardation (futures prices lower than spot prices), reflecting concerns about gasoline supplies as the US summer driving season approaches. That may sound counter-intuitive, given that gasoline stocks are at their highest level for nearly 15 years, but "we now have the template for a rapid draw-down" in stocks, he claims: the marginally positive crack spread and the weak dollar are making that a more appetising prospect than refining or importing.
Paul Horsnell, an analyst at Barclays Capital, claims WTI will average above $100/b in the second quarter and the year as a whole, strengthening yet further in the fourth quarter. Disappointing growth in non-Opec oil supply coupled with robust Asian demand suggest prices are well supported, he says. And, if prices were to show signs of easing much below $100/b, Opec would probably cut production quickly and decisively. But it may not have to.