Bet on black: Oil prices discover fresh energy

FOR a commodity used to grabbing the headlines, crude oil has been overshadowed by its cousins for much of 2010. Unlike copper, coffee or cotton, which have climbed steeply, oil remained entrenched in its trading range between $70 and $85 a barrel.

Not any longer. Cold weather sweeping across Europe, strong energy demand from emerging markets, and QE2-fuelled liquidity last week prompted crude oil to hit its highest level in more than two years. Traders shrugged off worries about the sovereign debt crisis in the Eurozone and policy tightening in China and bought into the black gold. Front-month Brent crude oil hit its highest level since October 2008, edging above $91 a barrel. Meanwhile, West Texas Intermediate (WTI) crude oil for January delivery rose to more than $88 per barrel.

Contracts for difference (CFD) traders are already starting to go long now in anticipation of further price rises next year. And they are not alone in their positive mood.

Such is the optimism among analysts that we are already hearing talk of a secular bull market in oil. Goldman Sachs analysts led by David Greely said last week: “Looking toward 2012, the stage is set for a return to a structural bull market in oil, with a new 2012 WTI price forecast of $110 a barrel.” They are also upbeat about the outlook for 2011, reiterating their $100 a barrel average 2011 price forecast for WTI, based on the expected draw on OPEC spare capacity next year.

Koen Straetmans, real estate and commodities senior strategist at ING Investment Management, is not as bullish as Goldman but nonetheless reckons that oil could be trading between $80 and $100, thanks to the recent additional QE in the developed world and the expected subsequent capital flows towards the emerging markets as well as a cyclical rebound in China.

“It’s already happening; we are already trading above $87 a barrel,” says Straetmans. While he admits that the balance of fundamentals is not good at the moment he points out that we are seeing small improvements: “The International Energy Agency (IEA) has upped their demand forecasts slightly for 2010 and 2011 and there has been some tentative reduction in inventories.”

“Fears about European sovereign debt and Chinese monetary tightening linger in the background, but the run of positive oil demand surprises and robust economic indications has continued globally towards the upper bound of their trading range,” say energy analysts at Barclays Capital.

The surprising scale of the positive demand shock for oil – world demand estimates are 2.41m barrels a day for 2010 – has meant that excess inventory has dissipated rapidly.
“The global recovery especially in the US, the world’s largest consumer, continues to erode the elevated inventory levels. Investors are increasingly convinced that energy prices will be rising over the coming months and have been adding to existing long positions,” says Ole Hansen, senior client advisor at Saxo Bank.

But while CFD traders are likely to see their long oil trade turn profitable, they should be wary about the sovereign debt crisis curbing risk appetite, and by extension the demand for oil.

Equally, sharp tightening by China could also pose a risk to long positions, says CMC Markets’ Michael Hewson. “For the moment the oil price is being driven higher by demand from Asian economies and positive economic data out of China, however there is a tail risk of fiscal tightening that could see these growth forecasts slip back if China, as expected, starts to raise interest rates over the coming months.”

These concerns aside, time for CFD traders to refocus on the black gold.