Nymex crude hits record high as equities plunge

Abu Dhabi: The Dow Jones Industrial index officially crossed the bear support level, registering a 20 per cent decline since its all time high in October 2007.

This had a significant impact on the Nymex benchmark West Texas Intermediate crude contract: With no place else to go, investment and speculative hot money has exited equity and credit markets and poured into commodity futures markets, which they simply can't absorb without prices becoming distorted.

The Nymex crude nearby futures price could contain as much as $30 of speculative and fear-based price premium over what current supply-demand fundamentals would justify.

The nearby futures contract for Nymex crude reached $142.99 a barrel before closing out the week at $140.21, a gain of $0.57 on the day, and up from $134.62 for the week.

The back months gave up what the fronts gained, reinstalling a backwardation price structure seen earlier this year.

It means markets - for whatever reason - expect crude delivered in two to three years to be less costly than crude delivered today or in the near future.

The reasons for this thinking range from mere technical trading explanations to an assumption that some of the difficulties seen now - expensive steel, too few engineers, geopolitical challenges - might have subsided by then, making it easier for production to increase and reach markets.

But by 2015, demand from China will eat up any production gains anticipated.

Add India, Brazil, Russia and the Gulf states, and rocket science is unnecessary to determine that crude will likely be even in shorter supply then compared to now.

Last year at this time the Nymex WTI sold for $70.69, up from $68.90 53 weeks ago.

Local markets

As in New York, except for the occasional IPO, local bourses have not been a joyride of ever-higher prices, with the effect of investment funds seeking better markets.

Some are finding them in commodities markets. But so far this quarter, the Dubai Mercantile Exchange's Oman contract has yet to register the kind of volume and open interest gains as have been seen elsewhere. It is just a matter of time, however, until it does, at which point it will attract hedgers from all over to utilise its relative price stability.

The DME Oman heavy sour August delivery contract closed out last week at $134.10, up from $130.75 the previous week. This indicates that what is happening on Nymex is the result of new money seeking a profitable home, rather than of some sudden change in the demand-supply fundamentals of crude.

Natural gas

Nymex natural gas closed last week at $13.19 per million btu, down from $13.50 the previous week. Price patterns for the out months continue an undulating pattern, reflective of the strong seasonal trading characteristics of this commodity.

While once the bucking bronco of energy markets with its price ups and downs, natural gas has been handling itself rather like a 14-year-old plow horse with its slow and steady price changes. Again, the reason is that natural gas markets, with their regional anchors, do not attract the hot money flowing into the internationalised crude oil markets, making NG prices a better gauge of fundamental supply and demand relationships for this increasingly important market.

The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.