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Crude Oil Nears $80 after API Supply Data Adds Weight to Bulls

18th Nov 2009, 10:49 am Crude Oil Nears $80 after API Supply Data Adds Weight to Bulls

Well it’s that time of the week again, investors will turn once more to weekly inventory data to gauge the latest changes in the fundamental US supply-demand factors. In recent sessions West Texas Intermediate Crude has continued to trade between US$77 - $82 per barrel.


Last week’s bearish inventory data pushed prices towards the lower end of the range, however this week, better than expected data from the American Petroleum Institute (API) forced crude futures back above $80 in overnight trading.


The API reported a 4.3 million barrel draw-down in crude inventories last week - many analysts and commentators are pointing to reduced production, processing and oil transportation in the Gulf of Mexico caused by Hurricane Ida last week as the reason.


The more closely followed US Department of Energy inventory report is scheduled later today. Oil bulls will look to the report to confirm the improved inventory outlook implied by the API. In previous weeks, many analysts have referenced the fact that US inventories are currently at comparatively higher levels and raised doubts over the validity of $80 oil, based current supply-demand dynamics.


Analysts identified the weak dollar as the primary stimulant in crude oil’s recent rise to $80. Some suggested that the weak dollar has been masking the fundamental supply and demand issues in the underlying energy market which are claimed to imply that prices should be lower.


Similarly in several reports earlier this week, prominent energy consultant and market commentator Daniel Yergin said that the current oil price does not reflect the supply-demand dynamics in the physical oil market. Daniel Yergin is the Chairman of Cambridge Energy Research Associates, he won a Pulitzer Prize in 1992 for his book: ‘The Prize: The Epic Quest for Oil, Money and Power’.


Typically a weaker US Dollar provides support to the oil market for two principle reasons. The first is due to the fact that primary commodity market is priced in US Dollars. A weaker dollar directly increases the relative value of the commodity for investors outside the USA, in simplified terms, the cheaper the dollar is, the more of the commodity an investor can buy with the same amount of the stronger domestic currency.


Secondly, investors and traders often purchase commodities such as crude oil and gold as a protection against inflationary forces. When the US Dollar falls investors buy the commodity to retain value.


Whilst many will debate the relative factors and influences on the current oil market, others argue that the general consensus points to the sustainability of current prices.


Earlier this week, the executive director of the global energy advisory body, the International Energy Agency (IEA), suggested that crude demand will grow next year, led by emerging economies such as China and India. According to Nobuo Tanaka, emerging economies will provide almost half of 2010’s global demand. Meanwhile Mr Tanaka said that the developed economies, OECD (Organisation for Economic Co-operation and Development) demand would be almost flat.


The relatively positive tones reflect the views of Gazprom Deputy Chairman Alexander Medvedev, who in a report from the Associated Press (AFP) over the weekend declared an end to the ‘Epoch of cheap oil’. While speaking in Asia Medvedev commented on the crude price in 2010, stating that crude prices will be anywhere in the region of $75 to $85 next year.


In London oil and gas stocks generally recorded marginal gains on Wednesday morning. BG Group (LSE: BG) and British Petroleum (LSE: BP) climbed almost three quarters of a percent, while Royal Dutch Shell (LSE: RDSB) rose around half a percent. Elsewhere Cairn Energy (LSE: CNE), Petrofac (LSE: PFC) and Tullow Oil (LSE: TLW) were practically unchanged as each stock only moved a couple of pennies each.


In the FTSE 250, Dragon Oil (LSE: DGO) advanced 2% this morning, Soco International (LSE: SIA) and Afren (LSE: AFR) climbed more than 1% each while Dana Petroleum (LSE: DNX) followed as it rose around three quarters of a percent.


JKX Oil & Gas (LSE: JKX) and Premier Oil (LSE: PMO) were fairly neutral meanwhile Heritage Oil (LSE: HOIL) slipped half a percent lower.


In the junior market, AIM listed oil & gas explorers and developers were more actively traded, Matra Petroleum (AIM: MTA) and Borders and Southern (AIM: BOR) advanced almost 8% each. Iraq and Middle-East operating explorer Petrel Resources (AIM: PET) followed as they climbed 5%.


Energi Oil (AIM: ENEG) and Regal Petroleum (AIM: RPT) were also stronger each rising around 3.5%. Similarly Gulfsands (AIM: GPX) and Petroceltic (AIM: PCI) were in positive territory rising 2.5% and 1.5% respectively.
Moving in the other direction,

Hardy Oil & Gas (AIM: HDY) and Encore Oil (AIM: EO.) slid more than 3.5% while Max Petroleum (AIM: MXP) was 1% lower.

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