By Kishori Krishnan Exclusive To Crude Investing News
Oil rose for a second day on Wednesday, after an industry group reported U.S. crude stockpiles dropped for the second week in a row and the dollar declined. Oil has climbed 34 percent this year, tracking global equity markets on optimism that an economic recovery will spur demand for fuel. Additional support for crude prices came from the dollar, which fell to the lowest level against the euro since March, bolstering demand for commodities as a hedge against inflation.
Oil supplies fell by 3.13 million barrels to 370.7 million last week, the American Petroleum Institute said late on Tuesday. “With more data out today, there is now a hope they will also show inventories are no longer increasing,” said Sintje Diek, an analyst at HSH Nordbank in Hamburg. “People are expecting that oil demand will be stronger again and everything will recover.”
Crude oil for June delivery rose as much as $1.05, or 1.8 per cent, to $59.90 a barrel. On Tuesday, it climbed as much as 2.7 per cent to $60.08 a barrel before closing at $58.85, the highest settlement since November 11.
Options for June-delivery Nymex crude contracts will expire tomorrow, and the majority of trading is centered on a strike price of $60 for options to buy and sell. The underlying June futures will expire on May 19.
“Bulls have shown that they are still in control,” said Olivier Jakob, managing director of Swiss consultancy Petromatrix. “It is vital for them to move WTI above $59/bbl. They have started the first attempt this morning.”
But, why is the price of crude oil rising so fast when worldwide demand does not seem to have increased? Crude is about 80 per cent above the low of $32 it hit in December, although it is still far below the $147 mark touched last summer.
Though it is difficult to pinpoint the reasons for the recent surge in price, some analysts say one key factor is the low U.S. dollar. Crude oil is priced in U.S. currency, and if the dollar falls, it becomes cheaper to buy with foreign currency – prompting some countries to boost their energy imports.
China increased its crude oil imports by 14 per cent in April, according to a government agency report, and this has probably helped boost the price, they added. Oil prices have trended higher in recent sessions, after averaging about $50 a barrel last month, as improved economic data raised bets that the economy is headed for a recovery sooner rather than later.
But prices are still sharply below last summer’s all-time high of $147 a barrel as the weak global economy continues to undermine demand for crude.
As demand has withered, U.S. crude supplies have risen to their highest levels since 1990. And analysts surveyed by research firm Platts expect the government’s weekly inventory report to show another 1.4 million barrel gain when it’s released Wednesday.
Venezuela’s oil woes
Armed with a newly minted law paving the way for nationalization of oil service companies, President Hugo Chavez ordered Venezuela’s state oil firm to seize the assets of 60 local and foreign service firms nationwide.
The decision to take over a key part of the oil business signals the president’s willingness to expand government control over the country’s top industry regardless of the risks involved.
The takeovers follow his 2007 decision to nationalize multi-billion dollar oil production projects in the crude-rich Orinoco region that were once operated by a handful of the world’s largest private sector oil companies.
In Friday’s rash of seizures, Williams Co. (WMB) of Tulsa, Okla., which handles high-pressure gas injection plants in the Andean country, saw its assets taken. A week ago the firm said it would write down a $241 million payment default by state-owned Petroleos de Venezuela.
Other firms are expected to suffer as well, especially those offering shipping services in the oil-rich Lake Maracaibo. But Oil Minister Rafael Ramirez has said oil services heavyweights such as Halliburton Co. (HAL) and Schluberger Ltd. (SLB), won’t be affected.
Nonetheless, “Chavez has sent a shot across the bow for the entire oil service sector,” said Patrick Esteruelas, an analyst with New York-based Eurasia Group, a political risk consulting firm. “This is a very strong message for oil rig companies playing hardball and reluctant to agree on a writedown of their bills.”
Oil importing countries including Pakistan have largely escaped the direct effects of the global crisis because of the positive impact of lower oil prices and their limited links to global financial markets.
However, as the worldwide recession has deepened these countries face weaker prospects for exports, foreign direct investment, tourism, and remittances. An International Monetary Fund (IMF) Regional Economic Outlook for Middle Eastern oil importing countries-Afghanistan, Djibouti, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Syria, and Tunisia-revealed.
Nearly all the region’s 22 countries will be affected by the global crisis in important but different ways, the report notes. The Middle East’s oil-exporting countries-Algeria, Bahrain, Iran, Iraq, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Sudan, the United Arab Emirates, and Yemen-are feeling the impact mainly through the sharp fall in oil prices and the tightening of credit conditions.
Amid high oil prices and strong investor interest the region, these countries grew by nearly 6 per cent per year between 2004 and 2008. With lower global demand for oil, however, GDP growth rates are forecast to decline to 2.3 per cent in 2009 from 5.4 per cent in 2008.
Oil importers also face slowdown: This group has mainly been affected by slowdown in their trading partners-Europe, the United States, and GCC countries-which has led to a fall in exports and foreign direct investment, according to the report.
Kurdish oil flow
Meanwhile, oil from the Kurdish region of Iraq will begin to flow into world markets within a matter of weeks after a landmark agreement between Baghdad and the regional government.
The prospect of profits from new oil discoveries in Kurdish Iraq pushed up the share prices of independent oil explorers active in the area, including Addax Petroleum, the London-quoted oil explorer, and DNO, the Norwegian company. Kurdish oil exports will increase the pressure on Baghdad to agree deals with multinationals such as BP, Shell and ExxonMobil that have been held up in disputes over the profit share between the Iraqi State and foreign investors.