Business | Oil & Gas
Oil to hit $60 in December futures contracts
The steepest plunge in crude prices on record may be setting up oil investors for a rally this year, if history is any guide.
- Bloomberg
- Published: 23:35 January 5, 2009
- Workers at a refinery in Bosnia. Oil prices have risen by more than 25 per cent since Israel launched its offensive against Hamas on December 27.
- Image Credit: Reuters
New York: The steepest plunge in crude prices on record may be setting up oil investors for a rally this year, if history is any guide.
The so-called forward curve of futures contracts traded on the New York Mercantile Exchange suggests oil will rise 28 per cent to $60.10 a barrel by December.
The curve looks almost the same as 10 years ago, after Russia's default and the collapse of the Long-Term Capital Management LP hedge fund raised concerns that a global economic slowdown would reduce energy demand.
Crude prices fell 25 per cent in the final quarter of 1998, the steepest drop in seven years.
Bets on a recovery paid off then as the Organisation of Petroleum Exporting Countries cut production 6.9 per cent, causing prices to more than double in 1999.
Now, Opec is pledging to reduce supply 9 per cent, companies from Royal Dutch Shell Plc to Valero Corp. are postponing new energy projects and central banks are cutting interest rates to end the worst financial crisis since Second World War.
"The world economy will get into a more stable environment most probably in the second half of next year," said Christoph Eibl, who helps manage more than $1 billion at Tiberius Asset Management AG in Zug, Switzerland. "Commodities are thus due for a rebound. Crude oil has the best potential."
Eibl's Absolute Return Commodity Fund gained 7.5 per cent last year in part by betting on agricultural commodities and industrial metals.
He beat the Standard & Poor's GSCI Index of 24 commodities, which dropped 43 per cent, and oil, which fell 54 per cent. A 30 per cent gain this year would be the most since the 57 per cent jump in 2007.
Traders are already taking advantage of prices in the forward market exceeding those for immediate delivery, a so-called contango. About 26 million barrels of oil may be stored in tankers until later in the year.
The crude, valued at $1.2 billion at today's prices, will be worth $1.57 billion based on December contracts, potentially locking in a profit for investors after expenses for financing, storing and insuring the oil.
Crude for February delivery traded at $46.89 a barrel at 9:50am in London today, compared with $60.10 for the December 2009 contract.
At the end of December 1998, oil for February 1999 was at $12.05, compared with $13.78 for December of that year, a difference of 14 per cent.
Twenty-eight of 30 analysts tracked by Bloomberg forecast higher prices by the end of 2009, with a median fourth-quarter estimate of $70.
Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington, is the most bearish. He said in December that oil will trade at $40 in the fourth quarter, almost 14 per cent lower than the January 2 close, data compiled by Bloomberg show.
Slowing economies may cut demand by about 700,000 barrels a day this year, he said.
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