By Edward Tapamor
A number of factors have been underpinning the new highs set by the crude oil market this week. The most obvious is the perennial tightness in the market that will simply not go away.
Russian output has been at the centre of problems the market has been pricing in. There are a number of basic difficulties surrounding production from Russia, one of which is the poor state of investment in its fields. But more worrying problems also persist.
Firstly as Russian output is generally flat, at around 9 million barrels per day, the announcement that the state thinks output may actually fall set a few pulses racing. Some people we have spoken to are also constantly worried by the way Russia reports its reserves, basically shoddily.
Companies like BP been milking cheap but productive fields in Russia as they seek to boost returns. That day is drawing to a close and investment is needed and fast.
The result of Russian problems has been a mark down in the non OPEC supply by the International Energy Agency (IEA) and OPEC, by around 100,000 barrels per day for 2008.
Other numbers that have been thrown in the mix include U.S. gasoline demand that simply will not die. It is up 1 per cent year on year in March as the U.S. fails to find another way to transport itself around the country. Despite the subsidy led backing of ethanol the country is still gulping down the hydrocarbons.
This is likely to be exacerbated in the short term by the restart of an alkylation unit at BP s Texas City refinery. This will allow the U.S. to pull in even more crude oil, tickling prices even higher.
Driven by China the demand for oil globally now appears to sit around 87 million barrels per day, slightly up on figures for 2007 and up around 1.2 million barrels per day on the same time last year.
This has been driven by consumption from China and India where both countries are showing how wrong some market forecasters can be. The idea of price elasticity , in that when prices reach a certain point demand dies, are being ridiculed by the way these two countries are consuming hydrocarbons. Put simply, they are only starting to buy the product and they see current prices are nothing more than the going rate.
Rather as when Biro pens started off they cost the equivalent of $500 people still paid for them. There was no elasticity in Biros because people thought that is what they cost, so that is what they paid. This is what China is doing right now.
The same thing has happened with every branch of consumer culture in the West. Be it cars, jeans, air con or double glazing. The trouble with hydrocarbons is that we cannot simply phone up the wholesaler and replace them, hopefully for a cheaper price.
They would like to do this in the U.S. at the moment because although stocks are not dangerously low they are depleting at around 800,000 barrels per day at the moment in a time of year when they are supposed to be building. Another irritant to the price.
So, as we write, the price of WTI is jumping over $116 per barrel, another record. If we track some basic retracements then you should look for resistance on the downside at $111.01, $108.54 and $106.55 going right down to $98.10, although we think that is highly unlikely any time soon.
If the news flow next week is slow, or less worrying at least you could see WTI test $111. But if the news out of the Middle East continues to be dogged by OPEC unable to add any more production then there is no reason why WTI should not continue its march upwards.
We think the start of the corporate results season with Eni [NYSE:ENI] of Italy starting up next week may focus a few minds. We think they are likely to post a drop in production, we think the OPEC ministers will carry on their that s all folks line and we expect to see prices hold over $115 and maybe start to begin a climb towards $120.
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