PARIS (ResourceInvestor.com) -- In the past week or so, we have once again seen the price of Brent crude touch $70. But now it appears that even a plateau of $70 oil is not worrying politicians and bankers unduly. There is no great hurry on the parts of central banks to raise interest rates. How did we get to this point? And when Brent breaks out of its range, which way is it going to go? Up or down?
Let us have a look at the way down. It does not seem too likely right now, but the case for the bears does have some legs. Firstly economic activity is patchy and that is what normally drives the crude price. In many parts, if not all, the United States we have a marked fall in housing prices.
One that has been going on close to a year and is yet to stop. That feeds into other sectors like construction, transportation and so on. Which in turn creates patchy consumption of goods and services.
The marked fall in housing has also happened in Spain. There over supply has been the main factor. Back in the U.S. crude consumption may not have been quite as high in the first quarter of the year as we thought. Figures from the U.S. Department of Energy show that consumption of crude rose by 1.4% in the first quarter, set against the same period last year. That is a lot of oil, but it is not spectacularly more.
The bears also point to the fact that the world seems slightly away from the next major war. We have had senior, open diplomatic contact between the U.S. and Iran. That is undoubtedly true and hopeful for the people in the region. It is not so good for the price of a barrel of oil.
The bears also assume that the weather situation we have had over the past two seasons is what they consider more ‘normal’. In other words the very warm winter, especially across Europe and most of the U.S. But before that, the benign hurricane season in the U.S. Gulf of Mexico.
Then they point out that the situation in Nigeria, as we write there is almost 900,000 barrels per day of various types of Nigerian crude, shut-in. Yet the price of oil does not bounce around when the pipeline at Nembe Creek goes down again shutting in more of Shell and Chevron’s production.
What about the refinery situation? The WTI index is much lower than the price of Brent because U.S. refineries keep having that odd problem, bits do keep dropping off. Even as John Manzoni, the head of BP’s refining at the time of the Texas City disaster, finally quit his post U.S. refineries can not cope. This has led to a glut of oil at the delivery point of Cushing and forced down the price.
But then these arguments work both ways around. Because at $68 per barrel of oil if any one of these factors turns bullish, it makes it easy to beat the records set last year. Does it need an incident in the Gulf? Does it need all the Americans - staying at home due to the weak dollar - to have a good summer travelling? After all one thing we cannot say is that nothing will happen. All it needs is one hurricane.
