Five Reasons: Why Oil Isn’t Coming Down…Yet
Posted by David Gaffen
April 15, 2008, 1:26 pm
The myriad reasons for more buying in oil has boosted price of the benchmark crude contract again — lately traded at $113.50 a barrel on Nymex. Should it hold above $111.76, it would establish a new closing record for the contract — the ninth such occurrence since the beginning of March.
Analysts increasingly believe that instead of nervously waiting on lower oil prices, people might have to get used to these lofty values for the price of oil and other energy products. MarketBeat takes a look at the primary drivers behind this:
1. Capacity. The oil-producing giants, such as Saudi Arabia and Iran, are pumping about as much oil per day as they possibly can — spare capacity is barely a couple of million barrels, and demand continues to outstrip this supply. Not for nothing was it that Petrobras, the Brazilian oil giant, rallied 8% Monday on news of a discovery despite only vague details about the oil field. “We’re at 97% to 98% capacity — and it’s an industry whose production is subject to not only normal problems that any producer has but subject to a lot of geopolitical risk,” says James L. Williams, energy economist at WTRG Economics, London, Arkansas.
2. Heating oil. It seems strange, but while gasoline tends to be the chief catalyst for the pre-summer rally in crude oil, heating oil has asserted itself as a major factor. That’s because of increased demand for distillates such as ultra-low-sulfur diesel. Such products, along with jet fuel, impact the trading in heating oil.
3. The weak dollar. This is a bit of an old story, of course, but the dollar’s weakness makes the commodities that are dollar-backed all the more valuable for foreign investors. The U.S. Dollar Index, which tracks the currency against those of six trading partners, lately traded on ICE Futures at 72, not far from its all-time low of 70.7. “The lower the dollar goes, the more valuable [dollar-backed commodities] become on the world stage,” says Darin Newsom, commodities analyst at DTN in Omaha.
4. Speculation. Large speculators still hold substantial long positions in crude oil, natural gas and heating oil, according to the weekly data from the Commodity Futures Trading Commission, and buying from funds has remained healthy. “It seems to be one of the only profitable homes for speculative money,” says Mr. Williams. Technically oriented investors may help in pushing the price of oil to $125 a barrel, according to Mr. Newsom, as Tuesday’s new high could motivate more buyers.
5. Gasoline. The Energy Information Administration has noted that gasoline demand is sluggish in the U.S., but that doesn’t extend to the rest of the world. The expectation is for reduced driving in the U.S. this summer, but for now, that’s only a forecast, and the price of gasoline remains extraordinarily high. According to AAA, the average regular gallon of gasoline is $3.386, more than 50 cents higher than a year ago.
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