Renewed jitters send Nymex crude soaring

Abu Dhabi: Last week a combination of factors - the usual suspects, really -caused New York traders to bid WTI up to $138.54 a barrel, an $11.19 increase over the previous week's closing price.

Last year at this time WTI crude sold for $64.76 less than today's price.

The back contracts, those for delivery in later years such as 2013, did not participate in the price run-up of the nearby July WTI contract, an indication that Friday's price gain on the New York market is more or less a local phenomenon and does not represent a more general restatement of crude oil market values.

On Friday (1) news that Israel stated that an attack on Iran's nuclear facilities is all but inevitable; (2) technical short covering of the nearby WTI contract; (3) bad US economic news that weakened the US dollar; and (4) another Goldman Sachs prediction of crude near $140 by July 4 coupled with a Merrill Lynch prediction of $150; all combined to send the WTI nearby contract skyward, gaining the most over a two-day period in over a decade.

The dollar value of the speculative bubble in WTI crude has been approximately $20-$25. Last week another $5-$10 of speculative froth was added. It was the result of self-fulfilling expectational trader behaviour where everyone tries to buy before prices go any higher, forcing prices higher, in a self-perpetuating process.

Far from seeing a top, as this column predicted a week ago, it is not clear how high WTI could go. In speculative bubbles price run-ups accelerate until something reverses the bullish trader predisposition.

Local crudes

The importance for WTI's price increase for local crude prices is unclear. Asia, the main consumer of Gulf crudes, continues to gain in demand. And the weakness in the US economy is becoming less important with every GDP reporting quarter. Gulf crude prices are expected to exhibit greater stability than WTI, which will continue to experience greater price extremes.

The Dubai Mercantile Exchange continues to deflate speculative forces by again increasing margin requirements for its crude futures contracts.

DME Oman spot crude settled Thursday at $122.62 in after-hours trading, down from the previous week's $124.73 in regular session, but up from the previous week's after-hours close of $121.10. The Opec basket ended the week at $118.77, down from the previous week's $124.27.

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