Oil Prices Hit US$100/b for First Time

A Symbolic Moment

For the first time ever, crude oil prices have done what was—until only a few years ago—seen as unthinkable. Fuelled by renewed violence in Port Harcourt, the centre of Nigeria's oil industry, together with reports that several Mexican oil export ports were closed due to bad weather, the NYMEX light, sweet crude oil for February delivery surged more than US$3/b yesterday to the brink of US$100/b. Oil prices had flirted with US$100/b several times in the second half of 2007, only to fall back each time, and on the first trading day of 2008 it appeared as if it would again fall short of the symbolic triple-digit price marker. However, according to the Financial Times, a single independent trader then claimed the record, conducting a US$100/b trade for the minimum 1,000 barrels of crude. The deal, conducted by Richard Arens of brokerage ABS at a hefty premium to prevailing prices on the trading floor, was nevertheless considered a valid trade by NYMEX, thus establishing a new record.

Prices on the Globex electronic system were at US$99.53/b before the momentous US$100/b trade, then fell down to about US$99.40/b immediately after the trade, suggesting that Arens took a US$600 loss with the symbolic trade. While setting a new price record may have been more about claiming the title of the first US$100/b trade rather than a reflection of the true market value of oil, prices did not exactly fall off the radar screen afterwards. Indeed, NYMEX oil closed at US$99.62/b yesterday, still up US$3.64/b on the day. Brent North Sea crude oil for February delivery, which hit an intra-day high of US$98/b yesterday, closed up US$3.99/b in London to settle at US$97.84/b.

US$100…and Climbing?

Oil prices have eased somewhat today in Asian trading, with the NYMEX February contract trading down 32 U.S. cents compared to the record close of US$99.62/b yesterday, while Brent crude for February delivery was down 43 U.S. cents in Asia to US$97.41/b. However, with U.S. weekly crude inventory data slated to be released today (a day later than usual due to the New Year's holiday), there is an expectation that the US$100/b barrier could be breached, with prices continuing to rise. The U.S. Energy Information Administration (EIA)'s inventory report is expected to show a decline in supplies of distillates, including heating oil and diesel fuel, although traders are anticipating a rise in gasoline (petrol) supplies and refinery activity. U.S. crude stocks fell 3.3 million barrels to 293.6 million barrels in the previous weekly report, for the week ending 21 December, marking the sixth weekly decline in a row and a drop of around three times what had been expected.

A similar surprise in today's inventory report could put the bulls in motion once again, particularly in such a tight market. Still, although fundamentals are helping support a high price floor, speculators are being blamed for the recent surge. Post-holiday trading volumes were about 50% of normal yesterday, meaning the price move was likely exaggerated by speculative buying. Indeed, supply concerns in recent weeks have mounted, putting upward pressure on prices, even as many of the concerns about supply disruptions have yet to materialise. Renewed violence in Nigeria, with 12 people reported killed in Port Harcourt, have stoked fears that crude output from the oil-rich Niger Delta region could be further reduced. Likewise, concern over the impact of last week's assassination of Pakistani opposition leader Benazir Bhutto on regional stability helped prices rise, as did fresh Turkish military strikes on Kurdish positions in northern Iraq—even though neither of these events actually resulted in a disruption in oil supplies.

Outlook and Implications

Geopolitical tension, some winter weather and the closure of key Mexican oil export terminals as a result, and a healthy dose of speculation (and sentiment for achieving a symbolic trade), make a sure recipe for crude oil prices hitting US$100/b. A weak U.S. dollar, which makes oil more affordable for countries with stronger currencies, and continued strong demand are helping support a lofty price floor for crude. Furthermore, a report by OPEC yesterday saying that its member nations may not be able to meet demand as early as 2024 did little to dispel fears that the supply crunch could worsen, although OPEC did say that this deadline could slide for decades if members increase production more quickly.

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