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Oil & Gas Journal

Sam Fletcher
Senior Writer

The June contract for US light, sweet crudes jumped to a record of $126.27/bbl May 9 on the New York Mercantile Exchange before closing at a record $125.96/bbl, gaining a total $9.64/bbl over five trading sessions that week.

North Sea Brent crude gained $10.84/bbl to $125.40/bbl that same week. Gasoline matched crude's gains on NYMEX, up $9.66/bbl to $3.20 gal. "But no one could come close to the weekly gains of heating oil at $17.64/bbl, [closing at a record $3.64/gal on May 9]" said Olivier Jakob at Petromatrix, Zug, Switzerland.

The price rally was fueled in part by evidence that Venezuelan President Hugo Chavez has aided rebels in the attempted overthrow of the government of Colombia. Investors fear Venezuela will cut off crude supplies to the US if the US government imposes sanctions against that country.

Market speculation
Many analysts attribute the oil-price surge to a general weakness of the US dollar against other key currencies and to the large amount of speculative funds invested into the commodities market. As a result, a bill is pending in the US Senate that would impose speculative-trading limits for West Texas Intermediate on the London markets, like those on the New York market.

"Since 2002 and the beginning of the boom in commodity prices, it has become increasingly fashionable to blame a large part of this rise on the speculative community," said Adam Sieminski, chief energy economist for Deutsche Bank, "While we agree that disconnects between price and underlying physical fundamentals can occur due to investor flows, we believe that such anomalies cannot persist for long and that underlying fundamentals remain the ultimate drivers of commodity prices, forward curves, and volatility."

Moreover, he said, "The rally in nonexchange traded commodity prices, such as molybdenum, cadmium, and ferrochrome, since the end of 2002 has been similar if not greater in magnitude than the rally in exchange traded commodities, such as crude oil and copper, where speculative inflows are possible." Sieminski said, "We believe this refutes the claim that speculators have been the primary drivers of rising commodity prices during this cycle. Rather it may be an indication of the increasing pricing power that resides with commodity producing companies and countries."

Sieminski said, "The oil price has continued to rally in the face of a stronger US dollar and confirms to us that this relationship was always built on shaky foundations. We do not see any signs yet that non-OECD [Organization for Economic Cooperation and Development] oil demand is suffering from the rise in oil prices. On our various measures, oil prices would need to rise above $150/bbl to be considered extreme."

Goldman Sachs Group Inc. forecast crude costs could escalate to $150-200/bbl within 2 years (OGJ Online, May 6, 2008). In 1985, a team of Goldman Sachs analysts forecast a spike of crude prices to $50-105/bbl at some point within a few years because of continued unexpected strength in world oil demand and economic growth, especially in the US and China. Olivier Jakob at Petromatrix, Zug, Switzerland, said, "Crude oil is currently held up in a tug-of-war between the Goldman reality and the physical reality. Even though the world economy has not yet proven that it was able to cope with the first super spike (on a dollar-adjusted basis we are only starting to approach the $105/bbl of the first Goldman super spike), it still makes a great story to support pension funds piling more into commodities."