Crude futures surged Thursday on the back of positive US economic data and signs of improving demand. Crude-oil futures rose until Thursday on forecasts of lower US oil inventories, with markets appearing to have shrugged off the effects of the International Energy Agency’s release of 60 million barrels of crude and oil products.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in August traded at $97.41 a barrel at 0703 GMT, up $0.76 in the Globex electronic session. August Brent crude on London’s ICE Futures exchange rose $0.65 to $114.27 a barrel.
“The market is firmer after the American Petroleum Institute reported lower US stockpiles...and we expect the Department of Energy’s data to show a fall (in oil inventories),” said Tokyo-based Newedge Japan trader Yusuke Seta.
The API, an industry group, reported Wednesday that US reserves of crude, gasoline and distillates — including heating oil and diesel — fell 3.2 million barrels, 1.9 million barrels and 1.6 million barrels, respectively, for the week to July 1.
Markets felt bullish with the growing perceptions of a strengthening market over the next months. Such perceptions were enough to add fuel to the fire. Goldman Sachs said Thursday it was expecting considerable oil price upside in the next 6-12 months as rising demand fueled by improved global economic growth cut into OPEC spare capacity.
“With world economic growth continuing to drive oil demand growth well in excess of non-OPEC production growth, the oil market continues to draw on inventories and OPEC spare capacity in order to balance,” Goldman Sachs said in its Commodity Watch report. “In our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply.”
As such, Goldman Sachs now forecasts a WTI crude price of $111.00/b in three months, $115.00/b in six months and $126.50/b in 12 months, this compares with $108.00/b, $114.50/b and $126.50/b forecasts from its May 24 Commodity Watch report.
For Brent crude, Goldman Sachs said its three, six and 12-month forecasts were now to $117.00/b, $120.00/b and $130.00/b. In its May 24 report Goldman had forecast prices of $115.00/b, $120.00/b and $130.00/b, respectively.
“We continue to expect that oil demand growth fueled by moderate economic growth expectations will be sufficient to draw down crude oil inventories and OPEC spare capacity by early next year, leading to considerable oil price upside on a 6- to 12-month horizon,” Goldman said.
For heating oil, meanwhile, Goldman said that while US distillate stocks started the year well above last year’s levels, inventories have declined sharply over the course of the year and have so far lacked the typical seasonal increase over the past weeks.
In the meantime, Barclays Capital too raised its 2012 oil price forecasts, boosting its Brent price estimate by $10 to $115 a barrel, and its Nymex forecast by $4 to $110 a barrel next year. However, Barclays commodities analysts left their 2011 expectations for Brent steady at $112 a barrel and lowered their average annual price of Nymex contract for the year by $6 — to $100.
“The increase in 2012 is based on a further narrowing of global spare capacity ... and by our view that the overall geopolitical context of the market is likely to become increasingly uncertain as 2012 progresses,” Barclays Capital said in an update on oil markets.
Yet a lot of negatives too continued to hover above the crude horizon. Some analysts kept emphasizing prices risk falling again. “If Russian media reports that Libyan leader Qaddafi would be willing to step down under certain conditions are in fact correct, the geopolitical risk premium on oil would drop further, said a report from Commerzbank in Frankfurt. “In this case, the price could retreat quite considerably toward the level seen for a time after the IEA announced that it would be releasing strategic oil reserves. “
Citigroup too added its weight behind the perception. It said Brent will fall to $90 a barrel by September because of the International Energy Agency’s move to release oil reserves and an increase in Saudi Arabia’s production, before bouncing for the longer term.
And in the meantime, concerns about moderating economic growth in China and euro zone debt woes too kept a lid on gains. Soft manufacturing data from China and ongoing worries about Europe’s economy have been weighing too on crude sentiment.
Renewed euro zone debt worries after Moody’s slashed Portugal’s credit rating into junk territory, also helped in keeping a cap on oil prices. Moody’s said there was a great risk the country will need a second round of financing before it can return to capital markets.
Moody’s also warned that its credit outlook on Chinese banks may turn negative as China’s local government debt may be understated by as much 3.5 trillion yuan ($540 billion).
And the fluctuating crude fortune became more evident Friday, with US unemployment figures rising to 9.2%, indicating at best a stagnant economy and softening oil demand. Crude prices took a two percent dip on Friday, with prices retreating from positive territory immediately after the report’s release. Light, sweet crude for August delivery fell $1.73, or 1.8%, to $96.94 a barrel on the New York Mercantile Exchange. The contract earlier traded as high as $99.18 a barrel. The release had a stronger impact on Nymex prices, the benchmark widely used in the US Brent crude on ICE Futures Europe, the European benchmark, recently fell 55 cents, or 0.5%, to $118.04 a barrel.
Markets seem torn between the two ends. Perceptions — rather than fundamentals — are in driving seat — once again. In the immediate run, demand remains soft — despite the spikes. Yet in the longer run, issues seem impacting — one can’t deny. If Libya is not back on stream — sooner rather than later — the available spare cushion would be under strain. The prospect of a tightening market — as projected by some — may not be completely out of tune.
