Crude prices steady as mood of optimism returns to market

The behaviour of crude prices is shifting: For the past six months any bearish news for crude prices has been taken seriously by traders; while any bullish news was ignored.

The market was downwardly biased. But now, bearish news has lost much of its ability to depress prices as we move into spring; while news suggesting price increases are in order are having a stronger effect than at any time in the last eight months.

Evidence of this is found in the price uptick on China economic and crude import data, and in the market's relative indifference to recent bearish news. Even while Opec decided against further cuts for now, and US crude inventories are approaching multi-year highs; and with little evidence that the US and Europe are about to turn their stumbling economies around - crude prices seemed to have formed a U-shaped bottom which has supported a $50.00 price floor.

News from Dow Jones in Shanghai that China's crude imports for March were up 33 per cent over February's quantity buoyed Middle East crude prices. Crude prices settled with marginal gains for the week. Midweek saw prices testing ten-day lows; but by the end of the week prices had gained back all lost ground and added to the previous week's closing prices.

The New York Mercantile Exchange's benchmark light sweet West Texas Intermediate closed the week at $52.24, just pennies below last week's close of $52.51. The InterCommodity Exchange's benchmark Brent nearby contract closed the week at $54.06, continuing a two-week trend of selling at a premium to either Dubai or New York benchmarks. The local Dubai Mercantile Exchange's Oman heavy sour finished the week at $52.19, just above last week's close of $52.03.

Once again the New York benchmark heating oil nearby futures contract, which acts to benchmark diesel, jet fuel and heating oil, closed out the week at $1.42 a gallon, making the third week the price settled just above $1.40. Again, with heating oil demand falling in Europe and North America with the coming of warmer weather, the steady heating oil futures price is a vote by the market that the bottom of the recession in the US and elsewhere might have bottomed, and that a possible upswing in commercial transport fuel demand might not be far off. The back months all show price increases over the nearbys, also indicating the market is anticipating slow but steady demand increases.

The Chicago Board Options Exchange's crude oil volatility index, the OVX, closed the week at 54.97, strongly down from last week's 61.86. This shows the demand for options to hedge volatility in oil prices is falling. Good news for hedgers who must protect their physical petroleum activities against price volatility that could harm profits.

The weekly Commitments of Traders report from the Commodity Futures Trading Commission also showed commercial hedgers paring back their futures positions as price volatility falls back.

With China judged the most likely to emerge first from the worldwide recession, news of crude import increases month-over-month will continue to support crude prices in the Gulf, the Far East's chief supplier.

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