PARIS (ResourceInvestor.com) -- The price of a barrel Brent crude is working its way back up to its records of $78.64 set last August 7. A steady and sure combination of factors has pushed it over $75 per barrel.
But when it pushes up against levels of $78 per barrel, which way is it going to go then?
The extra spurt oil needed to break through lines of resistance above $70 per barrel was the resumption of parts of the U.S. refining complex. The extra capacity online in the downstream has boosted the intake of crude oil needed to make gasoline, and prices have responded.
There has also been the unpleasant news of the kidnapping of an English-Nigerian 3-year-old child in Port Harcourt in the Niger Delta. One should be reminded that there had previously been two kidnappings of Nigerian children, where ransoms were paid, that have gone largely unmentioned. But the kidnapping of a child is likely to scare oil workers even more than the regular spate of abductions they themselves face on a weekly basis.
In themselves, these are not huge pieces of news, certainly not on the scale of a hurricane or war.
So one can expect that crude will test $78 per barrel in the next couple of weeks, maybe a month. There is going to be increasing demand for gasoline from U.S. consumers who, put off by the weak dollar that fell even further against sterling this week, are not going on holidays abroad.
Americans are going to be holidaying and going on days out inside the U.S. This, in turn, will boost demand for crude oil, and with more refining capacity set to come online, including at BP’s Texas City facility, you can expect demand to stay high.
If the current situation, the general state of the market, were to be maintained, this would be enough to make crude bang up against its record highs.
However, it is unlikely to be the only factor playing on the state of the markets.
As we have mentioned, Nigeria looks as if it is set for more problems. The new government has so far proved to be a clone of the last one. It is essentially the same gang of ultra-looters who regard their own citizens with the same regard ordinary folk give to ants. Except most people actually treat ants a little better.
There is the question of the Iraqi oil law that, although making some kind of progress through the legislature in Iraq, is going to be fought over for months, if not years to come. There remains the distinct possibility that whatever current politicians in the destroyed country agree, new incumbents, future representatives and politicians keen to please the population will rip the agreement to bits.
If you remember last year’s market, many people had already priced in the value added from a hurricane in the Gulf of Mexico. When one did not turn up by the start of September, a huge sell-off ensued. Now the opposite seems to be the case, we have a market without any hurricane premium. Were even a medium-sized category three hurricane to arrive in the Gulf, this would most likely further delay projects such as Thunderhorse and Atlantis.
The we have the all-important half-year figures from the major companies such as Total of France. They have the most bullish regard for their own crude output in 2006, saying they will add around 5%, but so far they have not. Were one of the majors to report any kind of setback in terms of output forecast, adding to the tightness in supply-demand terms, it could again boost prices.
Of course none of these events may occur, but generally in probability terms, that seems unlikely. Thus, we have to conclude that getting past $78 per barrel is a done deal. The next test after that would be $80 per barrel. That way recession lies.
