Local crudes gain as markets stabilise

Abu Dhabi: Convinced that oil had been over-sold, markets adjusted their outlook last week, increasing crude oil valuations.

Commodity markets have undergone an historic sell-off these past weeks as speculators and hedgers scrambled to increase cash reserves to meet contractual requirements.

Now clearer heads are deciding that current prices have reached a local bottom and are not likely to fall further.

The Dubai Mercantile Exchange's Oman futures contract closed the week at $61.60 a barrel in after-hours trading, up from $60.00 the previous week, while the New York Mercantile Exchange's West Texas Intermediate benchmark closed the week at $67.81, up from $64.15 the previous week.

China's poor

China's announcement that it will aggressively increase domestic demand to ward off job losses and increase spending among its 750 million rural poor, has assured markets that oil demand is not about to collapse.

As evidence, all the back delivery months for all benchmarks are higher, with 2012 delivery month prices and beyond for Asia-bound DME Oman heavy sour crude back contracts all above $80.00.

WTI contracts for delivery farther out in time are also higher than the nearbys, with 2016 delivery at $92.27, again clearly indicating the market's expectations that the world's macroeconomy will strengthen within about two years or less.

With the realisation that Opec's production cuts would actually make crude trading less risky by increasing surplus production to meet any emergency, crude prices fell dram-atically from their recent highs.

Momentum trading actually dragged prices to below long run valuations, even when discounted for lowered risk premium in the face of increasing daily oil balance surplus supplies.

Last week's upward price adjustments reflect a longer term reality.

The Chicago Board Options Exchange's OVX volatility index for crude oil is still at historic highs, closing the week at 80.56, just slightly below last week's 81.88, which was one of the highest scores on record.

Concurrently, the CBOE's broad-based equity volatility index, the VIX, has fallen dramatically, down from the 80's to its present 59.89, indicating that equity markets are regaining their footing, at least in North America, a bellwether for the rest of the world.

Continued dollar streng-thening and expectations that the euro will slide further down against the greenback is also pushing crude prices lower in nominal terms.

With a re-evaluation of commodities has come a re-evaluation of currencies, and US dollar strengthening against most major currencies - except the Japanese yen, which, for its own reasons, follows a separate trajectory.

Natural gas

Natural gas followed crude markets higher last week on expected market demand strengthening and on the belief that natural gas markets were over-sold and priced too low in terms of long run realities.

Trading in Nymex natural gas closed the week at $6.73 per million Btu, up from last week's closing price of $6.23. All back contracts remained higher.

Russia seems to be spearheading the development of a natural gas producer cartel.

The current working conference of gas exporters recognises 16 members, but Iran, Qatar and Russia are the price makers in this market.

Their choice of the word gas "troika" to describe the new gas cartel in the making is not a chance selection.

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