PARIS (ResourceInvestor.com) -- As Resource Investor has been pointing out for some time a breakout in the crude oil market has had to come. Finally the data from the United States, combined with the cold weather in the northern Americas, has woken the market to the fundamentals.
That is that gasoline stocks in the United States – once presumed to at “record highs” – have slumped by 80% in just seven weeks. The momentum has all been about a draw down in the distillate stocks for the United States.
The power of the U.S. market to propel the rest of the world’s prices is now unquestionable. We can only wonder at why the United States has been using so much gasoline but it is no doubt in part down to the effects of global warming. Nice autumns mean more day trips, more visits to the zoo or the park. And more trips to the pump.
Pressure on refinery capacity in the United States is also without doubt. The country is short on gasoline and needs extra capacity it cannot or will not build. There are expansions coming on the market but the growth in demand is unlikely to be sated without a recession.
Europe is not in such a dilemma, but will subsidise the American driver by paying more in the medium term as the price of crude oil filters through to their service stations. However at the same time Europe’s oil industry is creaming it in, taking the opportunity to export cargoes of 37,000 metric tonnes of gasoline to the United States from Amsterdam and Rotterdam as fast as it can ship them out.
So let us take stock. What we have seen in the recent pullback in prices, is the bounce from the wave of hurricanes Katrina and Rita. It seems strange still to be talking about them a year on, like lost loves. But Katrina’s effect, the market anticipation in 2006 of some kind of repeat, held the market in a heightened state of anxiety.
When the market realised the hurricanes were not coming it breathed a huge sigh of relief and fell. That coincided with the end of a brief proxy conflict between Iran, Syria, the United States and Israel in Lebanon. As the conflict contained such wanton destruction, far larger on the part of the Israeli military - but present on both sides - it threatened prolongation and further tension across the region.
Also let us not ignore that the United States consumes huge amounts of crude and Iran has lots of it - just like Iraq. If you were to suggest that this is not part of the equation in Lebanon, anywhere in the oil market structure, you would be looked upon as deluded. Of course it is.
So now we see oil breaking out in London back up out of its tight $55-$60.80 range above $64.20, as the Nymex trades at $63.49 intraday. At last we have seen a recognition of the situation.
The floor price of oil has once again been tested and has not broken at around $54.75. No one doubts the shortages in capacity. No one doubts the problems in refining. No one doubts the increases in consumption it really has happened.
The hurricanes were ‘blips’ but then we have ‘blips’ all the time - $78 in July for the Nymex and August for Brent was pulled back by a market relived and greedy. Relieved the hurricanes did not return, greedy to short the market. It then remained unsure for nearly two months. But one big question has remained. Which way would it break out? And with little prompting, some cold weather in the Americas and poor gasoline inventory numbers, it immediately breaks out to the upside.
We still say $61 on Christmas Day, sticking to what we have said before. But first maybe a run to $68 might not be out of the question. What is most interesting is that out of its stagnation the market rose.
