Crude prices gain on bottoming-out talk

Last week the December futures crude contract expired and we rolled forward to begin trading the January 2009 delivery month as the nearby fut-ures contract. Prices jumped about $4.50 per barrel for the week.

Two significant market sentiment indicators strengthened, indicating that major players - called commercials - believed crude prices had reached a local bottom and would fall no further for the time being.

The Chicago Board Options Exchange's OVX crude oil volatility index dropped out of the 80s to settle at 66.47, indicating reduced price volatility and consolidation around current prices.

The other metric, the Commitments of Traders report from the Commodity Futures Trading Commission, published each Tuesday, showed increased interest on the buying side.

Commercials, the largest market participants, were no longer selling heavily in the futures markets. They see prices rising or staying the same, reducing the need to sell in the futures markets to hedge their long physical positions by locking in prices before they fall further.

The New York Mercantile Exchange's benchmark West Texas Intermediate light sweet crude contract finished the week at $54.43 per barrel, up from last week's close at $49.93. Brent closed at $54.41, up from last week's $49.25 close. The local Dubai Mercantile Exchange's Oman heavy sour nearby future closed the week at $50.88, up strongly from last week's close of $43.50. Now all three crude benchmarks are above $50.00.

Last week's gains resulted from market sentiment changing. Nothing had changed in either the fundamentals or in the technical analytics of trading oil. But players concluded that crude had been oversold and began buying again.

The US dollar is trading within a range of a few pennies up or down. However, some economists have lately begun warning that dollar strength might not last much longer. Their reasoning is that the US central bank is injecting so much money into banks that it will begin to lose value when the economy recovers. And this can raise crude prices.

Natural gas unchanged

The New York Mercantile Exchange's nearby natural gas contract closed within three cents of its close a week ago at $6.51 per million British thermal units on seasonal demand and no upsetting news. The more distant delivery months were mixed but relatively unchanged.

Exactly what represented the tripwire for the current world economic slowdown may never be known; but any list must include over-extended credit and exploding commodity prices which the world simply could not accommodate.

If over-extended credit was the fundamental element, then the exponential rise in crude prices could have pushed the tottering system over the edge, causing crude demand to tumble and threatening economic prospects in the region.

Above $50 per barrel is necessary, however, for many crude supply expansion projects in the Southern Gulf states to go forward, and even higher for the majority of them. With sufficient expansion, the next boom will not end in a market meltdown.

- Dalton Garis is Associate Professor of Economics and petroleum market behaviour at the Petroleum Institute, in Abu Dhabi