Crude benchmarks gain on speculation of recovery

Abu Dhabi: Crude oil benchmarks gained last week on speculation that the world economic slowdown has bottomed out.

Even as many economists (including this author) cautioned that it is far too early to declare the recession over, both hedgers and speculators took advantage of brightened expectations for the near future to push crude benchmarks above the psychologically important $70 mark. Crude benchmark prices are now 50 per cent of their all-time highs reached on July 10, 2008.

Continued aggressive crude purchases by China, mostly headed for storage, supported prices all week. Tanker utilisation news indicated that while VLCC (very large crude carrier) tanker storage use had fallen 16 per cent over the last two weeks, Opec shipments are nonetheless on the rise, from 85 in previous months to 95 cargoes in May.

VLCC spot rates rose slightly over previous weeks on the news, with the Worldscale daily leasing index hitting 57 after virtually collapsing in the first quarter of 2009. (A Worldscale of 57 means that VLCCs are able to charge a daily lease rate of about 57 per cent of the cost of operating this class of carrier.)

All this buoyed crude prices. The local Dubai Mercantile Exchange's benchmark Oman heavy sour closed on Thursday at $70.91, up from $68.73 the previous week.

The New York Mercantile Exchange's nearby benchmark West Texas Intermediate closed on Friday at $72.25, and the InterCommodity Exchange's Brent finished at $70.76.

New York heating oil nearby futures, the chosen hedging vehicle for transport fuels, finished the week at $1.83 a gallon, up from $1.77 the previous week. Since March New York heating oil has risen 51 per cent.

Commercial petroleum hedgers increased purchases of short contracts by 19,586 to hedge against expected nearby price decline adjustments. Overall, open interest in futures contracts increased for the first week in June by 75,132, according to last week's Commitments of Traders report from the US Commodity Futures Trading Commission, an indication of increasing hedging and speculation activity in the wake of crude's strong recent price gains.

In line with this increase, the Chicago Board Options Exchange's OVX index of price volatility for crude on Nymex closed the week at 47.26, up marginally from the previous week's 46.75.

The oil forward curve for the Nymex WTI, similar to the yield curve in a bonds market, tracks how much crude is expected to increase over time.

Nymex crude delivery for June 2012 is $82.55, up from the previous week's $81.24, but not as much as the nearby delivery month, an indication that those trading for delivery two years and more in the future did not share last week in the nearby traders' strong optimism that all will be well in the world now.

Indeed, last week's China macro data was mixed, with some showing robust primary production growth, while secondary and tertiary (finished goods) production gave no strong upward signal. Still, the broad consensus among macroeconomists is that China is best positioned to lead the world out of the recession sooner than any other national economy.

- Dalton Garis is Associate Professor of Economics and Petroleum Market Behaviour at the Petroleum Institute, in Abu Dhabi.