Oil Retreats from Recent Highs

The NYMEX crude futures contract for June delivery yesterday shed US$3.12 to close at US$115.63/b. Meanwhile in London, ICE Brent June futures also fell, by US$3.31, to close at US$113.43/b. Key drivers for the latest fall in oil prices include news from the United Kingdom that the Grangemouth refinery will soon begin the gradual process of resuming operations, while slight U.S. dollar appreciation against the euro drove investors away from commodities such as oil and gold. Elsewhere, the Energy Information Administration (EIA), the statistical arm of the U.S. Department of Energy, has released data showing February demand for crude at a five-year low—evidence perhaps of some demand destruction expected from such high prices. Crude demand is, however, expected to pick up again in the United States as the country approaches the summer driving season, when demand for gasoline (petrol) is at its highest. Although the two-day strike at Scotland's only refinery has now ended, it may be weeks before Grangemouth is fully operational again. BP, meanwhile, has said the 700,000-b/d Forties pipeline could be up and running within 48 hours though full production from North Sea oilfields may take longer to resume. The Forties pipeline is responsible for bringing onshore around 40% of the North Sea's output.

A further point to watch out for over the coming days is what happens with regard to crude oil production in Nigeria, where over half of capacity is still offline due to labour disputes and militant activity. ExxonMobil, which has shut in almost the entirety of its 800,000 b/d of production, is now engaged in talks with the workers, though the supermajor has thus far refused to speculate on when the problem might be resolved. The end, however, might be within sight, given news this morning that employees have agreed to return to work while talks with ExxonMobil continue.

Outlook and Implications

Markets will next be looking for direction from the U.S. Federal Reserve, which is due to make an interest-rate decision later today. Sentiment is mixed over which direction the Fed might go. Economic data continue to be weak and consumer confidence to fall, suggesting that the Fed may seek to carry on its path of interest-rate reductions, resulting in a further 25 basis points cut to 2%. U.S. interest rates over the last seven months have so far fallen by 3.25 percentage points. Interestingly, there have also been suggestions that the Fed might be nearing the end of its programme of rate reductions, and may even decide today to keep them steady at 2.25%. It is partly this speculation that has prompted the U.S. dollar to gain against other international currencies, in particular the euro, and which has helped to drive down oil prices. If interest rates are cut, the dollar is likely to weaken, prompting capital to flow back into commodities in the short term, raising oil prices. Nevertheless, the scale of such a rise will be limited if the text of the decision suggests interest rates are likely to remain steady over the near term. At the time of writing, the NYMEX crude June futures contract was trading down slightly at US$115.28/b.

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