Dragons eating up a hoard of black gold

THE Chinese dragon continues to eat up fuel. Chinese demand for oil hit another record high in December, climbing to 9.618m barrels a day – an annualised increase of 19.9 per cent.

At least partly as a result, the price of crude oil has climbed up significantly over the last few months, with Brent crude oil getting to within touching distance of the $100 per barrel mark on 14 January, leading some commentators to wonder whether the crazed prices of 2008, when oil prices reached a peak of $147 a barrel, might not be about to be repeated.

Yesterday, however, despite evidence of much higher demand, from the USA as well as from China, oil price benchmarks fell back. The immediate cause was the Saudi oil minister, Ali al-Naimi, who hinted at possible supply increases to maintain price stability. WTI crude, the chief American benchmark, dropped by $1.27 to $87.84. Brent crude, a North Sea variety, fell less but still finished down at $96.81. So should CFD traders still be long on the black gold?

Unfortunately, it’s a little hard to say. Unlike many commodities, the market for oil is not particularly competitive. OPEC, a cartel of twelve oil-rich countries, controls around 44 per cent of global oil production and 80 per cent of total reserves. As a result of quota cuts in 2008, the cartel members currently claims to be operating with about 6m barrels a day of spare capacity – 4m of which is in Saudi Arabia. By expanding production, OPEC could easily neuter rising demand to hold down prices.

However, analysts at Goldman Sachs, led by David Greely, believe that that is unlikely. In a report, they speculated that increasing global inventories in fact reflect already increased OPEC production – implying a drawing down of spare capacity: “We expect a structural bull market to return to the oil market, with substantially higher prices” they said. The analysts predict that the price of WTI crude will climb to $103 within six months and Brent crude to $101.50.

Others are less optimistic. Will Hedden of IG Index points out that oil price strength partly reflects dollar weakness – which may well be reversing. “Unless there’s something significant, like another deep cold snap in Europe, we’re unlikely to see it get above $100 a barrel”. Hedden reckons that though prices generally may still rise, traders might do better if they look to profit from the narrowing of the premium between Brent crude and US crude – currently about $9, the widest the gap has been since February 2009.

The world’s economy is still deeply dependent on oil, but economic recovery does not necessarily imply rocketing oil prices, at least not just yet. But there may well be profits to be made for well informed traders by expecting conservative price rises. Other fuel consuming beasts are just reawakening.