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Oil linked to rise in the market

It was a stock that people loved to hate. During the first half of 2008, investors cringed when they saw rallies in the price of oil. As crude surged to $150 a barrel last year, equity investors bemoaned the hit, and worried and gossiped about the outlook for consumer-oriented firms which would need to spend more on gas.

Then the tide turned. In the latter part of the year, crude collapsed, and with it, global demand. And suddenly, crude oil was the market’s best friend. On days when crude-oil futures went up, it was a harbinger of improved demand. Investors have often pointed to the rebound in crude, to about $53 a barrel from a closing low of $33.98 a barrel on February 12, as a major source of support for equities.

“It is almost as if the market wants to see oil rally,” says Phil Flynn, senior market analyst at Alaron Trading, a commodities trading firm, because of its status as a bellwether for the market. “Short term, the market is hoping for higher oil because it is a sign of economic hope.”

Like Texas wildcatters, stock market investors have charged into the oil sector this year – and they have hit a gusher of profit. While the overall market has gone nowhere since the start of the year, shares in ExxonMobil (NYSE:XOM) soared 22 per cent through March 2, while ChevronTexaco (NYSE:CVX) rose 18 per cent, BP (NYSE:BP) 11 per cent, Royal Dutch/Shell Group (NYSE:RD) 10 per cent, and France’s Total (NYSE:TOT) 8 per cent. Those are only the latest surges in a two-year rally that has sent the collective market capitalization of the oil world’s Big Five up a phenomenal 72 per cent, to $1.14 trillion, since early 2003.

Rising oil prices also translate to expectations for improved economic fundamentals world-wide. As if on cue, oil prices rose above $53 a barrel Thursday as encouraging U.S. data on durable goods orders and home sales spurred hopes for a recovery in crude demand. Benchmark crude for May delivery was up 85 cents to $53.62 a barrel by mid-afternoon in Europe in electronic trading on the New York Mercantile Exchange.

In London, Brent prices rose $1.22 to $52.97 a barrel on the ICE Futures exchange. Gains in global stock markets also supported oil prices, and the uptick in sentiment appeared to be enough to temper concerns over sharply accumulating inventories in the U.S., although analysts warned this may not last.

“Without the continued support of equities, crude oil should have more difficulties to move above the $55-a-barrel mark as the fundamentals are not yet providing enough evidence of a tightening market,” Olivier Jakob of Petromatrix in Switzerland, told AP.

On Wednesday, oil prices fell – the contract lost $1.21 to settle at $52.77 a barrel – on news that crude in storage last week rose 3.3 million barrels to 356.6 million barrels, according to the Energy Information Administration, much more than what was expected. The figure marks a 15.6 per cent rise from year-ago levels, and stockpiles are now at their highest level since 1993. But traders seemed to shake that off amid hopeful signs in the United States, the world’s biggest oil consumer.

Durable goods orders increased a better-than-expected 3.4 per cent last month, the first advance since July and the strongest one-month gain in 14 months, the Commerce Department said. New home sales also rebounded, rising 4.7 per cent to a seasonally adjusted annual rate of 337,000.

“We could see the rally go slightly higher from here,” said Christoffer Moltke-Leth, head of sales trading at Saxo Capital Markets in Singapore. “You have a little modest rally in Asia on the back of that, and that’s sort of helping crude a bit.”

The Nay sayers

But Moltke-Leth warned against reading too much into Thursday’s bump. He predicted that prices will be capped around $55 and could fall as low as $43 a barrel over the next two weeks as other big countries release key economic indicators that could very likely be grim. “Traders are so desperate that they are now buying, not on fundamentals, but rather on fear of missing out before this market heads back into the toilet,” said The Schork Report, edited by U.S. oil analyst and trader Stephen Schork.

Japan, which said exports plunged by nearly half in February, will release a quarterly business sentiment survey called the “tankan” next Wednesday that experts say is likely to be quite gloomy.

“Japan is the world’s third-largest oil consumer, and the tankan is expected to drop to a 30-year low,” Moltke-Leth said. “I see more demand destruction down the way.”

Venezuela‘s hope

Venezuela says it’s hoping for an average oil price of $60 a barrel this year, AP has reported. Venezuela relies on oil for 93 per cent of exports, but prices for its heavy crude have slipped 66 per cent since July – to an average $43.51 a barrel last week. President Hugo Chavez has asked lawmakers to adjust Venezuela’s 2009 budget to anticipate oil prices of $40 a barrel rather than last year’s $60-a-barrel forecast.

But Finance Minister Ali Rodriguez said in an interview with the Venezuelan newspaper ‘El Universal’ published Wednesday that the nation is still aiming for $60 oil. Venezuela has supported OPEC production cuts of 4.2 million barrels per day since September in a bid to boost plummeting world crude prices.

Company News

Calgary-based Oilexco (CVE:OIL) announced Wednesday that Britain’s Premier Oil will acquire all the shares of its subsidiary, Oilexco North Sea Limited (ONSL), for $505 million. Oilexco said the sale is expected to close in late May. The company also notes that the sale price is less than the amount owed by ONSL to its creditors.

Trading in shares of Oilexco was halted Wednesday morning. The company’s shares surged 60 per cent Tuesday.

In January, the company announced that its subsidiary was subject to an order from the court appointing four administrators from Ernst and Young to take over the function of the Board of Directors, saying at the time that the joint administrators were continuing a process for the sale of shares or assets of ONSL. Last month, the company received demand letters from The Royal Bank of Scotland for immediate payment of all amounts outstanding under its subsidiary’s credit facilities. Oilexco North Sea Limited’s facilities include a US $547.5 million senior and super senior credit facility and 100 million pound pre-development credit facility. Later the same week, Oilexco obtained a court order for protection under Canada’s Companies’ Creditors Arrangement Act and says it remains in CCAA.

Alberta Clipper Energy (TSE:ACN) shares slid after NAL Oil & Gas Trust (TSE:NAE.UN) said it will acquire all of the issued and outstanding common shares of Alberta Clipper for a total consideration of $115 million, on Tuesday.

This is to be paid through the issuance of approximately 5.7 million trust units of the Trust, representing $37 million at a deemed price of $6.45 per trust unit and the assumption of an estimated $78 million in Alberta Clipper net debt at closing.

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