Crude oil climbed nearly 1.5% from two-month lows suffered last week, as the US Dollar weakened further and equity markets rallied across the globe. In electronic trading this morning Globex WTI crude futures, advanced about $1/barrel and were last changing hands at $77.30.
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.
According to several reports this morning, 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’.
Many analysts and market commentators have also identified the weak dollar as the primary factor in the recent strength in crude oil markets. Despite challenging fundamental conditions which have shown relatively high inventories and weak demand in the US, the oil price remains stuck just below the key $80 mark.
Whilst many will debate the relative factors and influences on the current oil market, the general consensus points to the sustainability of current prices. Over the weekend the Associated Press (AP) reported that Gazprom’s Deputy Chairman Alexander Medvedev 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.
London listed oil and gas equities got off to a good start this morning. Petrofac (LSE: PFC) chalked up the biggest rise on the FTSE 350 oil and gas index, with a gain of 2.2%. Supermajors BP (LSE: BP) and Shell (LSE: RDSB) added 1.6% and 1.3% respectively, while Tullow Oil (LSE: TLW) also tacked on 1.6% and BG Group (LSE: BG) advanced 1.1%.
Midcaps also did well, with the exception of Dragon Oil (LSE: DGO), which posted a small loss. Fellow mid tier oil companies Dana Petroleum (LSE: DNX) and Heritage Oil (LSE: HOIL) both added 1.5%.
In the junior sector, Africa and FSU operating oil and gas developer Victoria Oil & Gas (AIM: VOG) gained 8% after reporting gas shows from a well currently being drilled at its Logbaba gas and condensate project in Cameroon.
Empyrean Energy (AIM: EME) was also in demand after it reported progress at the Quinn horizontal well in Texas.