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Abu Dhabi: Last week the Nymex WTI nearby contract astounded onlookers as it smashed through $135 a barrel before retreating back and ending the week at $131.70, up from $126.29 last Friday.
Last year at this time WTI crude sold for $64.76.
Several forces have been blamed for the price run-up past $135, the main one being that those who had sold crude short (betting prices would fall) saw it continue to rise, and had to cover their short positions and bail out.
A sharp eight per cent decline in open interest in the nearby contract indicated many traders were making round turns, reducing open interest while prices rose sharply. This normally evidences short covering and explains the $3-$5 rise, which in per centage terms was about a four per cent increase, expected for short covering.
Another handy explanation is that the dollar began falling again after steadying at $1.55 to the euro. But the per cent change of a two or three pennies-per-euro erosion in exchange rates is just two per cent. Such a small move needs confirmation to see if it represents a directional change or is just the result of some profit-taking.
The Goldman Sachs research calling for $200 a barrel in the near future was old news and not capable of swaying market sentiment very much last week. But it did work to give traders permission to buy.
The strongest reason for the continued rise in prices is the market becoming contango, where the contracts for delivery several years from now are trading higher than nearbys and cash prices. Markets are realising that high prices are here to stay.
As evidence, the WTI back contracts again gained the most for the week, with crude delivery for June 2010 rising to $129.06, up from $123.65 the previous week; and June 2015 closing at $132.25, up from $125.61 the previous week.
Local crudes
Local markets are also becoming contango. Last week DME Oman spot crude settled Thursday at $128.98, the highest Oman OSP to date. After-hours trading, which is informed by Asian Friday futures, settled at $125.15. The previous week it was $119.34, with after-hours trading at $118.30.
But the January 2009 contract closed last week at $132.01 before declining in after-hours trading to $128.07.
Asian-bound local crudes are resuming their upward direction once again after reacting negatively to the China quake. Bulk shipping into Chengdu has resumed and demand is not expected to be hit as hard as first imagined. The Opec basket ended the week at $127.59, up almost $9.00 for the week, reflecting confidence in Asian demand growth and putting heavy sours bound for Asia on almost the same price footing as the light sweet benchmarks. Asia is now seen as the locomotive of the world's economy, replacing the slower-growing West.
Natural gas
Prices for Henry Hub Nymex natural gas reached $11.86 per million btu, up $0.77 for the week. This is considered the result of local adjustments from the previous week, when it lost $1.02 for the week, almost exactly the previous week's gain.
At the New York City delivery gate natural gas closed at $12.18, a change for the week of $0.13. Natural gas is range-bound, with little news affecting it as northern hemisphere economies swing over to air conditioning and away from heating demand.
The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.
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