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Bulls lock horns over oil prices

Libya is buoying the oil price, but a peak may be nearing

With Muammar Qadhafi still fighting rebels in the country and continuing unrest in other oil producing nations, banks have started trading blows over the direction of crude prices.

Front month Brent was trading at around $124/b on 26 April, off a peak of nearly $127/b, while WTI was at $112/b. Conflict in North Africa and fears of unrest spreading to other producers continue to support the market. But sentiment is shifting. US investment bank Goldman Sachs suggested the oil market may have peaked, although its view was criticised by Barclays Capital (Barcap).

“Not only are there now nascent signs of oil demand destruction in the US, but also record speculative length in the oil market, elections in Nigeria and a potential cease-fire in Libya that has begun to offset some of the upside risk owing to contagion, leaving price risk more neutral at present levels,” long-time crude-market bull Goldman said in early April.

But a few days later Barcap released its own note. In it, it took a swipe at Goldman Sachs and justified its bullish view, saying that markets were “far out of kilter” and the “highs for oil prices this year are not yet in”.

Political heavyweights also waded in. US President Barack Obama said markets were well supplied and implied that speculators were driving up prices. Saudi Arabia also said ample crude is available, adding that it had already cut back on production. The International Energy Agency (IEA), meanwhile, warned of new erosion of demand, but maintained its forecast that consumption would rise by 1.6% this year.

The agency also said that oil in floating storage was on the rise, supporting theories that crude supplies remain abundant despite strong prices.

The loss of Libya’s high-grade crude has supported Brent, where a sharp backwardation in the market suggests traders are worried about a short-term disruption in quality-oil supplies, even as output of heavier grades rises.

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