Crude ponders growth potential, dollar changes

Abu Dhabi: With any decision about the proposed US $700 billion rescue plan for the frozen-by-fear financial markets clouded by political indecision, world oil markets were mostly at a loss to decide if prices were likely to head higher or lower.

The US dollar weakened sharply against other currencies before steadying and regaining some value against the euro and the British pound by the end of last week. Again, doubts about the continued strength of growth in world markets made gauging the likelihood of dollar strength extremely difficult. But by the end of the week nothing was settled, leaving crude markets and foreign exchange markets with no strong signal.

But consensus by the large commercial crude traders seemed to be building that oil prices might have stopped falling and could be heading upwards again.

This was shown by the figures in the Commitments of Traders report released last week by the US Commodity Futures Trading Commission, a closely watched data set which shows the relative buy and sell positions of the largest commercial and noncommercial traders.

The net positions indicate that the commercials are unsure whether they expect crude prices to rise or fall in the near future. However, the last market movement by commercials was to reduce their short positions, indicating their belief that prices will likely begin rising again.

The New York Mercantile Exchange's West Texas Intermediate benchmark crude, after starting the week near $100.00 a barrel and rising to about $110.00, closed the week at $106.89. Again, there was a lot of action (buying and selling) of crude oil options to sell oil at $114.00 and above, indicating that they expect prices to increase. (An option on a futures contract gives the buyer the right -but not the obligation -to buy or sell oil at a future date.)

The DME Oman heavy sour benchmark, after falling earlier in the week, ended about where it began, finishing in after hours trading at $96.65, above the official selling price (OSP) of $94.69 at the close of floor trading on Thursday. A week ago the contract closed at $93.10.

It became increasingly clear that China was again seeing economic activity increase and the demand for petroleum would be rising along with it.

China last week announced the introduction of an economic stimulus package through the banking system, but this is already being scaled back as new data indicates it might not be needed.

Nymex natural gas benchmark trading closed the week at $7.62 per million Btu, after closing the previous week at $7.53, and the week before that at $7.36. All the back contracts were higher.

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