Business | Oil & Gas
Crude's losses just a pause in an upward trend
New data on weakening demand will push prices lower, but commodity rally could continue for the next three years
- By Dalton Garis, Special to Gulf News
- Published: 23:28 September 6, 2008
Last week crude oil market prices continued to fall, now down more than $40.00 a barrel since topping out at $147.27 in July. But this is likely just a pause in an upward trend in commodity prices, a trend most believe will be sustained for the next three years at least.
But with markets already deciding that oil had been bid up too high in recent weeks, and new labour reports showing the eighth consecutive month of job losses in the US, any data suggesting that petroleum demand is weakening would send prices further downward.
Prices for New York Mercantile Exchange's benchmark West Texas Intermediate closed last week at $106.23 down from 115.46 the previous week.
However, all the more distant delivery contract months were priced above the nearbys, indicating some confidence that future demand will again push prices upward. For the past several years the daily oil balance has fallen from over six million barrels per day in early 2000 to between less than one million barrels per day to just over two million barrels per day recently.
Markets considered the smaller amounts just inadequate to address potential geopolitical emergencies which could negatively affect oil's long supply chain, a concern which has added over $25.00 to a barrel of crude as a risk premium on the market price.
Now, with the daily oil balance possibly able to increase as a result of reduced world demand, markets are systematically drawing down the risk premium dollar value of delivered crude oil, accelerating the current downward price trend in crude markets. After strengthening all week against the euro and pound, the dollar lost ground Friday on the bad US labour report.
For the week, however, the dollar strengthened significantly, also reducing petroleum commodity prices, which are priced in dollars.
Local trades
The DME Oman contract was lower for the week but steadier in its price behaviour than New York's more news-sensitive market crude. The nearby (November delivery) contract closed out the week at $101.52, down from last week's $111.30.
Possibly softening China demand and the strengthening US dollar were the likely reasons. All the back contracts also fell but remained higher than the nearbys.
The Nymex natural gas benchmark closed the week at $7.48 per million Btu, slightly down from last week's $7.94, but up from mid-week prices, as reports of surprising storm damage to Gulf of Mexico natural gas rigs became known to the Nymex trading pits. The more distant delivery month contracts were all significantly higher than the nearby.
European markets are not expected to see any reduction in natural gas demand since so much is for domestic heating requirements as well as industrial applications.
European natural gas sells for far less of a discount to crude oil than in the US, which should pressure gas market prices, except that crude in Europe for retail markets is heavily taxed, keeping demand for natural gas largely unchanged.
US Vice-President Dick Cheney's visit to the strategically important natural gas transshipment republics of Georgia and Ukraine is not likely to assure Europe that gas supplies are now safe.
With supply volumes in doubt and demand steady, natural gas in Europe is expected to remain relatively high.
- The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.
More from Oil & Gas
More from Business
Business Editor's choice
-
Saudi-Bahraini economic ties hit new high
Whilst press reports continue speculating on a possible new political structure defining ties between Saudi Arabia and Bahrain, facts on the ground confirm ever- stronger economic ties between the two neighbours
-
Cupid targets the Fed with early tweets
Declarations range from pure romance to cute overtures and racier fare
-
Do unemployment figures flatter to deceive?
Jobseekers and recruiters give out mixed signals ranging from optimism to downright despair even as official data show recovery
