Sunday, July 04, 2010

Crude Dips but Total Warns of Year-end Price Spike

Crude prices dipped yet again last week, especially towards the end of the week, as bearish trends witnessed in the wider financial markets clobbered commodities. Additionally, the US Department of Energy reported a 1.9 million barrel peak-to-trough decline of crude oil inventories (gasoline and distillate inventories both rose).

The drawdown was above expectations and NYMEX WTI August contract fell 30 cents to US$75.64 a barrel in New York following publication of the report. In fact, crude prices, instead of being the exception, were following the norm as commodities in general suffered their first negative quarter since 2008, if the past three months are anything to go by.

Problem these days is that higher institutional investor participation in commodities markets has without a shadow of doubt, at least in my mind, increased the connection between forex carry trade and stock market fluctuations with commodity assets. Still, most oil market commentators I have spoken to forecast crude prices as well as commodities prices to reverse last week’s losses as the supply and demand scenario has not been fundamentally altered. In fact, it remains strong.

However, Christophe de Margerie, CEO of oil major Total believes crude prices could spike on account of an entirely different reason – the Gulf of Mexico oil spill. Speaking to the Wall Street Journal, he said that while it remained necessary to drill in deep waters to meet global demand for fuel, tougher safety rules could result in higher crude price.

"Total’s policy is clearly towards zero risk. All this means potential additional costs," de Margerie said, adding that oil prices could reach US$90 a barrel by end-2010.

© Gaurav Sharma 2010. Photo courtesy © Cairn Energy Plc

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