Crude closes in on year's high

Oil prices are near their highest in a year, after an unexpected drop in US petrol stocks briefly sent crude above US$78 per barrel. Even after dropping back towards $77 in early trading yesterday on the New York Mercantile Exchange (NYMEX), crude is still at a level not seen since the middle of last October. It has surged 11 per cent in the past week, as investors shifted funds into commodities and away from the US dollar, reflecting increasingly bullish sentiment about the global economic outlook.

Instead of swelling in line with analysts' predictions, petrol inventories fell by 5.23 million barrels last week in their biggest drop since September of last year, the US government reported on Thursday. More government data showed that the number of Americans filing first-time claims for unemployment benefits also fell last week, adding to investor bullishness about the recovery of the world's biggest economy, and helping to bolster oil prices.

But analysts noted that the big drawdown of petrol stocks was mostly caused by petroleum refiners cutting processing runs because of low profit margins and continued weak demand for oil products. US refineries operated at 80.9 per cent of capacity last week, the lowest level since April, according to the government figures. "It makes you wonder how bullish this is for the crude market if they are dropping refinery rates," said Gene McGillian, an analyst at Tradition Energy, a US energy consultant.

Other analysts said the latest figures on US oil inventories did not change the weak supply-and- demand fundamentals that have overhung the oil market for the past year. "There's plenty of oil out there if you want it, but refiners don't need it," said Rick Mueller, the director of oil markets at Energy Security Analysis in Massachusetts. Analysts did not rule out a further move upwards in crude prices in the short term, which they said might be linked to stock market buoyancy or any further weakening of the US dollar against other major currencies. The dollar has sunk to a 14-month low against the euro this week, making dollar-denominated commodities such as crude more attractive to investors holding other currencies.

Abu Dhabi stocks hit an 11-month high on Thursday as oil hit $76 and after an overnight rally in the US saw the Dow Jones Industrial Average break the 10,000 barrier for the first ime this year. But in the absence of any hard evidence of the long-awaited pick-up in oil demand, most analysts were guarded in their longer-term market forecasts. "Looking towards future price developments, the past five months are likely the best indication of what is expected, with prices moving sideways in a $60-$75 window. There is currently no fundamental reason supporting a price rise, and the path back to $100 per barrel will be a long and protracted one," the Vienna-based consultancy JBC Energy said in a research note. "Market participants have already priced in a reasonable economic recovery and it is more likely that prices will fall to $65 per barrel instead of surging to $90 per barrel."

Nevertheless, "crude prices may climb an additional step in the current drive-based economic optimism and investment money inflows", the firm added. Indeed, bets that crude would exceed $100 in December jumped 10 per cent on the NYMEX on Thursday, as the underlying futures contracts rose to their highest level this year, according to data the exchange released yesterday. In other oil-related news, Nigeria's Movement for the Emancipation of the Niger Delta said it would resume attacks against the country's oil industry and military forces, ending a 90-day ceasefire it had declared in July. For more than three years, the rebel group has targeted installations in the oil-rich Niger Delta, claiming to be fighting for a fairer share of oil revenues for the region's impoverished residents. Its actions have forced down the Opec member's oil output by about a third.

But until the world's oil supply glut clears, regional supply threats are unlikely to have much impact on crude prices. According to the tanker-tracking consultant Oil Movements, Opec will trim oil shipments this month by about 0.4 per cent. The current crude prices are "an incentive for Opec to pump more, but it doesn't make sense in the context of supply and demand", said Roy Mason, the company's founder.

tcarlisle@thenational.ae