Chinese demand strength is key to Gulf crude trend

Abu Dhabi: With near-term demand unknown, crude prices last week took their cue from stock markets, rising or falling with them.

After reaching around $67 a barrel in midweek, WTI rose back above $70 by week's end on stronger stock market results. US demand for transport fuel continues to be reduced, even as domestic gasoline prices are falling to near $3 per gallon, down from over $4 in the summer.

The key to Gulf crude prices is demand strength from China. Chinese demand has not been much affected so far. This could allow Gulf exporters to China to experience less reduction than anticipated.

DME Oman closed out the week at $64.01l in after-hours trading, losing more than 55 per cent of its value from its closing price of $141.20 the week of July 5.

West Texas Intermediate closed at $71.85, a 15-month low, and more than 50 per cent down from its all-time high of $147.27 in July.

WTI closed at $77.70. Keep in mind that it took from 1979 to 2007 to reach $80 on an inflation adjusted basis. Such a rapid rise is usually followed by a near-term 40 per cent reversal. The price should therefore be around $87 rather than the current $77.

Crude price highs also came at a time of dollar weakness. So the price overstated crude values on an inflation adjusted basis. Might the stronger dollar be understating prices today?

For Nymex and DME the back oil contracts continued to be higher than the nearby delivery months, indicating that the belief still exists for increasing oil demand in the coming years.

Nymex natural gas

Nymex natural gas benchmark closed at $6.79 per million Btu, up from the previous week's close of $6.53, on basically no price-altering news, just a re-evaluation of current fundamentals. All the back contracts were higher.

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