Consensus growing that oil prices are bottoming out

Abu Dhabi: Expectations are everything in market price discovery. The world's largest oil consuming economy showed a decline of 3.5 per cent on Friday, the largest decline in its GDP since 1982.

But this was significantly less than the predicted decline of 5.2 per cent. The big economic news this week might have been the World Economic Forum in Davos, Switzerland; but markets mostly ignored its gloom-and-doom discussions.

As a consequence, the Dow Jones Industrials fell just 148 points on Friday, closing just above the psychologically important 8,000-point level. And therefore, the March delivery month nearby futures contract for West Texas Intermediate light sweet on the New York Mercantile Exchange, after reaching $43.44/barrel, closed the week at $41.75/barrel, a gain of $4.04/barrel for the week.

March nearby heavy sours traded higher than New York's WTI throughout the week. The local Dubai Mercantile Exchange's Oman finished the week at $44.29/barrel; and the InterCommodity Exchange's Middle East sour finished the week at $42.53/barrel.

The Chicago Board Options Exchange index of crude price volatility, the OVX, which last week settled in the low 80's, closed on Friday at 77.10, after opening on Friday at 79.41. This is the market's vote that crude prices are becoming more range-bound within a price bracket between $38.00/barrel on the low side and perhaps $48.00/barrel on the high side; which is higher by about $4.00/barrel than what last week's data suggested the range would be.

Adding to the bottom consensus vote is the commitments of traders data from the US Commodity Futures Trading Commission, released this past Tuesday. It shows that after a slight increase for the previous week, the commercial hedgers are liquidating their short futures positions.

Producers are betting that crude is bottoming out, in which case locking in current prices in the futures market is less important, since cash prices are not expected to fall much further. This is the market's vote; it is its position on the expected move in crude prices. It would appear to be a safe bet, except for one thing: the unknown situation in China. But with some reports of violent worker demonstrations leaking out, China must increase domestic spending to replace export declines, so that job creation and purchasing power continue to grow.

The New York Mercantile Exchange's nearby natural gas contract weakened slightly from last week, closing Friday at $4.41/mmbtu. It traded the week in a range between $4.60-$4.40/mmbtu, settling at the range's bottom. News of continued supply expansion in North America and of commercial demand reductions, and the severe cold winter there is keeping prices at historically low levels.

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

By Dalton Garis Special to Gulf News

Abu Dhabi Expectations are everything in market price discovery. The world's largest oil consuming economy showed a decline of 3.5 per cent on Friday, the largest decline in its GDP since 1982.

But this was significantly less than the predicted decline of 5.2 per cent. The big economic news this week might have been the World Economic Forum in Davos, Switzerland; but markets mostly ignored its gloom-and-doom discussions.

As a consequence, the Dow Jones Industrials fell just 148 points on Friday, closing just above the psychologically important 8,000-point level.

And therefore, the March delivery month nearby futures contract for West Texas Intermediate light sweet on the New York Mercantile Exchange, after reaching $43.44/barrel, closed the week at $41.75/barrel, a gain of $4.04/barrel for the week.

March nearby heavy sours traded higher than New York's WTI throughout the week. The local Dubai Mercantile Exchange's Oman finished the week at $44.29/barrel; and the InterCommodity Exchange's Middle East sour finished the week at $42.53/barrel.

The Chicago Board Options Exchange index of crude price volatility, the OVX, which last week settled in the low 80's, closed on Friday at 77.10, after opening on Friday at 79.41. This is the market's voting that crude prices are becoming more range-bound within a price bracket between $38.00/barrel on the low side and perhaps $48.00/barrel on the high side; which is higher by about $4.00/barrel than what last week's data suggested the range would be.

Adding to the bottom consensus vote is the Commitments of traders data from the US Commodity Futures Trading Commission, released this past Tuesday.

It shows that after a slight increase for the previous week, the commercial hedgers are liquidating their short futures positions.

Producers are betting that crude is bottoming out, in which case locking in current prices in the futures market is less important, since cash prices are not expected to fall much further. This is the market's vote; it is its position on the expected move in crude prices.

It would appear to be a safe bet, except for one thing: the unknown situation in China. But with some reports of violent worker demonstrations leaking out, China must increase domestic spending to replace export declines, so that job creation and purchasing power continue to grow.

The New York Mercantile Exchange's nearby natural gas contract weakened slightly from last week, closing Friday at $4.41/mmbtu. It traded the week in a range between $4.60-$4.40/mmbtu, settling at the range's bottom.

News of continued supply expansion in North America and of commercial demand reductions, and the severe cold winter there is keeping prices at historically low levels.

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