Crude firm on G20 action, easing of banking rules

After trading in the lower part of its recent range crude prices settled with marginal gains last 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 last week's closing prices.

The reason for these end-of-week price gains was the optimism from the G20 meeting announcement of coordinated stimulus action to aid the world economy.

Characterised by commentators as either "historic," or "no big deal," markets, which are always concerned with perceived sentiment improvements, reacted positively on the news, pushing commodities and equities higher across the globe.

Gold fell as investors pulled money out of gold positions to increase equity purchases. This is all positive for economic recovery.

Selling gold is considered a net economic gain, as gold stocks do nothing and are seen by economists as a "leakage" of wealth from useful transactions.

The other positive econ-omic news last week was the decision by American banking regulators to ease the strict mark-to-market accounting rules which have been destroying the asset valuations of bank balance sheets.

Now, long term investments and asset holdings no longer need to be marked to their assumed market value each day.

This arrests the downward spiral in asset valuations which has crippled the US banking system.

Again, crude and energy markets liked the news, pushing crude in New York up by $2 in one day, a gain held for the rest of the week.

The New York Mercantile Exchange's benchmark light sweet West Texas Intermediate, closed the week at $52.51, slightly up from last week's close of $52.11.

The local Dubai Mercantile Exchange's Oman heavy sour finished the week at $52.03 up from last week's close of $50.31. Middle distillate markets, benchmarked by the New York Mercantile Exchange's heating oil futures contract, also gained for the week, with the New York nearby heating oil futures contract closing at $1.44 a gallon, up one cent from last week's close.

It is now generally accepted by crude futures traders that the world economy has probably bottomed out and has begun to recover; hence the recent price gains in the heating oil contract.

Since these are used mainly for transport fuel, their increasing price indicates a pick-up in transport demand and an associated increase in business activity.

The Chicago Board Options Exchange's crude oil volatility index, the OVX, closed the week at 61.86, marginally up from last week's close of 59.08, again, pointing to bottom price consolidation.

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