Business | Oil & Gas
Crude market reacts to self-fulfilling predictions
The Nymex WTI nearby contract overcame resistance at $126 a barrel, almost breaching $128 before settling back on Friday at $126.29, up $2.17 on the day but just $0.33 in a week that had seen crude fall back early before recovering on Friday.
- By Dalton H.Garis, Special to Gulf News
- Published: 00:08 May 18, 2008
Dubai: The Nymex WTI nearby contract overcame resistance at $126 a barrel, almost breaching $128 before settling back on Friday at $126.29, up $2.17 on the day but just $0.33 in a week that had seen crude fall back early before recovering on Friday.
Last year at this time WTI crude sold for $64.95.
Unlike the previous week's demand story, last week crude advanced largely on self-fulfilling predictions.
In an arena of constantly rising prices such trader behaviour is perfectly rational. (1) As prices advance buyers fear paying too much, so they buy now before prices rise any further.
But by accelerating their buying activity (2) they thereby force prices up, but only due to their own buying activities and not from any change in crude oil fundamentals.
Likely this was part of the reason Goldman Sachs is calling for a nearby high of around $141 a barrel for WTI in the second half of 2008.
This is in sharp contrast to KPMG's annual survey of the oil and gas industry executives released in April. As reported the previous week in this column, the survey showed 55 per cent of 372 executives surveyed saying crude oil will drop below $100 by the end of the year.
The smart money seems to be with Goldman Sachs. Psychology - not fundamentals - has been providing superior price predictability in recent years. Again, the non-news of Saudi Arabia saying it will not significantly increase crude production gave upward momentum to the bullish price trend, only because traders knew it should, so acted upon it accordingly.
The WTI back contracts gained the most for the week, with crude delivery for June 2010 at $123.65 a barrel, up $3.55; and June 2015 closing at $125.61, up $6.03 for the week, a dramatic increase for such a distant contract.
Futures crude markets are becoming contango, where the back time period contracts sell for more than the nearbys, reversing the past backwardation, where distant year delivery contracts sell for less than the nearbys or spot crude.
Last week DME Oman spot crude settled Thursday at $119.34 a barrel. After hours trading saw it fall back $1.04 to $118.30 a barrel.
For the week DME Oman gained $1.29 a barrel based on the after-hours trading price, up $0.25 for the week.
Any potential gains for Asia-bound local crudes from the Goldman Sachs $141.00 a barrel prediction were dampened by the earthquake last week in Sichuan, China, which decimated a significant proportion of this most populous province's infrastructure, and may have killed more than 50,000, many of them children.
Natural gas
Prices on the New York Henry Hub natural gas benchmark were slightly down on supply calculations, closing on the Nymex at $11.09 per million btu, down $1.02 for the week, almost exactly the previous week's gain. At the New York City delivery gate natural gas closed at $12.05.
- The writer is associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.
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