By Edward Tapamor 23 May 2008 at 12:26 PM GMT-04:00
LONDON (ResourceInvestor.com) -- The last time out a fortnight ago we were expecting crude oil to test $130 per barrel mark and sit in a range between $125 and $130. But although we were correct in the first part the market has proved even stronger and more aggressive than we expected. It has been buoyed by poor oil production figures from Shell, ExxonMobil, Total and BP, underscored by continued robust demand from China.
Nymex crude breached $135 before falling back to sit at $133 per barrel as we write this column. But the most unusual factor has been the change in the forward curve, the price setting futures market, out to 2016 which has zoomed up as high as $141 per barrel.
The advent of a market where future oil is more expensive than current oil is called contango and this has been happening over the last fortnight. Although the forward curve is not quite in full contango it is only a matter of a few cents this way or that. The thing is $141 in 2016 is really not any kind of reflection on what the price of oil will be in 2016, we have seen repeatedly over the past few years that futures markets cannot predict prices.
After all what is the difference between predicting an oil price for 2016 or 2012, both are a good way away from now. No one can predict what will be happening in 2016, Iran may well be part of the U.S. empire by then, China may be in recession and the military may be back in charge of Venezuela. What would that do to oil prices?
What contango – and its inverse, backwardation - really does is spell out the slightly ephemeral part of today’s market. It is a bit like tuning in your radio with one knob on the side of your set and then fine tuning it with another. For example the spot price – your main tuner - will roll over into the next month’s contract and when that happens you can see how the current contract merges into the next.
So if you can, imagine all the contracts merging into one and you have a price range not for the future, but for today. In which case oil, right now, could be anywhere between $132 per barrel – its lowest point on the curve - and $141 per barrel, its highest point.
This is the range that we see oil sitting in, with a few provisos, for the next fortnight. There will be buyers if oil breaks down below $130, look for resistance levels at $130, then down at $129.41, $128.80 and a major barrier at around $127.49. Were oil to push its way down past $127.49 then the next big marker point would be $124.15. Nothing in the market looks as if it can justify this set of events however.
Instead oil can go on to try and find $140 to $141 per barrel. It may not get there in the next two weeks as the contango, in our opinion, is not fully justified by the basic supply and demand issues in the market. If oil breaks out upwards past $135 per barrel then look at $135.88, $136.41 and $137.01 as pointers to its direction. If it can weigh in past its old highs and keep going then there is no reason why $140 per barrel cannot come soon.
The more troubling underlying problems continue to haunt the markets however. First of all there is not actually any great newsflow that is troubling the market. There are no extra wars in the Middle East (beyond the catastrophe in Iraq), the Nigerian situation does not really bother the market - except in times of very tight supply issues – and a recent spat between Venezuela and the US over intrusion into airspace was quickly forgotten by the markets.
But what could propel oil up into very dangerous territory for the OECD economies – if it is not there already – is some kind of new news event. A new problem with Iran, a major hurricane, an Al-Qaida attack, a failed platform and so on. We seem to have forgotten that, right now, there are no major crises in major oil producing regions that are not already priced into the market. If we were to get one now, $135 per barrel could seem like the good old days.
(20min delay)