Oil Closes Above US$100/b for the First Time

Yesterday provided a double-whammy of new records as far as March-delivery NYMEX crude oil futures are concerned, with prices not only hitting a new record of US$100.10/b, but also closing at a new all-time high of US$100.01/b—up US$4.51 on the day. Meanwhile in London, Brent crude futures for delivery in April closed up US$3.65 to US$98.56/b. The previous NYMEX peak was set in early January when crude oil prices reached US$100.09/b. The cause of that particular jump was said to have been one trader wishing to make a mark for himself, but the event was nevertheless sufficient to highlight what very much appears to be a disconnect between the price level seen and where prices should be given supply/demand fundamentals.

Outlook and Implications

Oil is now some 67% dearer than it was a year ago, when prices were around the US$60/b level. Since then, the rise in prices has demonstrated an almost unbroken positive trendline slope upwards. Over the period, concerns over the health of the U.S. economy, itself a primary engine of the global economy, have come to the fore, driven mainly by the sub-prime mortgage crisis, and the resulting credit crunch. Since then, talk of imminent recession has never retreated far from the front pages of the news. Curiously, the prospect of weaker economic growth in the United States has so far done little to dampen oil prices—as would have been expected—but the relative weakness of the U.S. dollar in comparison with other global currencies will no doubt be playing a part here. Tighter refining margins in the world’s largest economy have managed to somewhat mitigate the full extent of price rises in gasoline (petrol) that might otherwise have been expected, yet this levee has failed to contain the situation entirely, with the result that new price records in refined products are being reached. The Energy Information Administration (EIA) is expecting gasoline firmly to breach the psychologically important US$3/gallon level this year, ensuring further constraints on economic growth as we approached the U.S. summer driving season.

The latest peak came upon expiry of the March futures contract, so it is quite likely that trader position covering was a contributory factor in the rise. Other prime suspects have included initial rumours circulating that OPEC was planning to lower oil output at its 5 March meeting. These rumours have since been displaced by an expectation that current production rates will remain untouched. The cartel, which is responsible for nearly a third of global oil output, continues to maintain that the world remains well supplied but that the future oil demand outlook remains uncertain—exposing a belief perhaps that it does not expect a recession in the United States to be either marked or prolonged. Meanwhile, the head of the EIA, Guy Caruso, has maintained pressure on OPEC to boost output to apparently little effect.

Two other news items may have also played a role in prompting fresh oil price records: an explosion at a U.S. refinery and suggestions that a leading member of a Nigerian militant group had been killed. In the first case, a blast at Alon’s 67,000-b/d Big Springs refinery in Texas in the last few days put the facility out of commission, with suggestions that it could be offline for as long as six months. This estimation has since been toned down to two months. In Nigeria, there has been speculation that Henry Okah, the financier and gunrunner of the notorious Movement for the Emancipation of the Niger Delta (MEND) militant group, had been killed while in government custody. MEND has itself waged war on the country’s oil output for years, and rumours of Okah's death have prompted concern that fresh attacks might be on the way. The Nigerian government has insisted that he is alive.

As ever, non-fundamentals seem to be driving large capital inflows into crude oil and commodities markets, in turn weighing in on crude oil prices, pushing them to ever-higher levels. Global Insight, however, believes there to be little reason, barring unforeseen supply shocks, why prices should not retreat over the coming days and weeks, once markets begin to digest recent events and their consequences more fully. After closing at yesterday’s new high, prices have since settled somewhat, and were down over 1% to US$98.99/b at the time of writing.

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