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Abu Dhabi: News of Israeli war games suspected to be a rehearsal of a bombing raid on Iranian nuclear sites sent the July West Texas Intermediate benchmark crude contract higher in heavy trading associated with the close of the nearby futures and options contracts last week.
Traders unwound their hedged and speculative positions before the contracts closed out, to allow financial settlements. The July contract finished at $134.62 a barrel.
Interestingly, the back contracts - those delivering oil in later months and years, actually fell by almost $4 before recovering and gaining slightly on the day.
The only news associated with such a price move was the announcement from Iraq that ExxonMobil, Shell, BP and Total have signed tentative production agreements giving these companies a head start in an oil production province that could still hold out potentially large gains both for themselves and for world oil supplies.
The pricing pattern over the various delivery years now has crude oil falling from the present cash price high, reaching a low price of $132.56 for the August 2011 delivery month, then slowly rising to $135.51 for the December 2016 contract month.
New York WTI July crude reached $136.80 before closing on Friday at $134.62, down a few pennies from the previous week's $134.86 a barrel. Last year at this time it sold for $68.90.
Today's consumer-producer conference hosted by Saudi Arabia in Jeddah will allow both sides to face each other and discuss their points of view in an open forum.
Nothing new is really expected from this forum that could affect supplies or demand.
Tight supplies
Unless there is an announcement of new oil supplies heading into production and to markets it is likely that crude prices might actually become more volatile after the meeting; a case of the other shoe hitting the floor.
In this case, the lack of any such announcement that might ease historically tight supplies in the face of relentlessly increasing world demand, after such an announcement might have been built into prices.
As developing econ-omies continue to expand at a compound rate of growth expect oil demand growth to rise at an exponential rate.
China's announcement that it will reduce government subsidies for petro-leum products will not slow oil demand growth very much, because it allows refiners to pass through more of their costs, which will increase crude demand.
The DME Oman contract closed out the week at $130.75 (OSP), up slightly from last week's OSP close at $130.21, likely as a result of the China subsidy cutback announcement which is expected to temporarily dampen price increases.
Evidence of this could be seen in the after-hours trading which saw the nearby contract fall to $126.25.
The Opec crude basket price ended the week within pennies of the previous week's close of $129.77, closing last week at $129.44.
Dominated by Asian demand considerations Gulf crudes are attuned to what happens in Asia and less to what New York might be mulling.
Nymex natural gas closed the week at $13.50 per million btu, up from $13.32 at the end of trading last week.
Contango pattern
With last week's US gas in storage down slightly from last year and the five year average, natural gas futures contract prices broke out of their backwardation pattern, as prices above and below the nearby and cash delivery price are seen in the back months in an undulating pattern.
This rearrangement could presage the beginning of a contango pattern setting in, where the back months, calculating insurance and storage costs are otherwise higher than the front months and cash prices.
Certainly there was little news last week that had much effect on either nearby or back month prices, just steady gains in relatively nonvolatile trading activity.
- The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.
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