Little doubt that oil prices will fall further

Business Materials 17 August 2008 05:50 (UTC +04:00)

Little doubt remains that crude oil prices, as well as other commodity prices, are biased down. ( GN )

Russian invasion of Georgia and its sabre-rattling against Poland failed to boost crude prices. On Friday the benchmark West Texas Intermediate settled the week at $113.77 a barrel, down from $115.20 the previous week.

Investors shrugged off all the bad news and continued to take money out of the commodities sector.

Crude prices now stand where they were in early March and appear to be a bargain compared to their recent highs.

The dollar's strengthening was not the main reason for commodity price declines. Rather, the dollar strengthened in response to new data released last week showing that Europe is beginning to falter econ-omically, suggesting that ECB will soon need to cut interest rates. This makes the dollar look good.

Further, the US economy seems to be capable of bouncing back sooner than Europe's.

The benchmark Dubai Mercantile Exchange's Oman heavy sour contract closed trading for the week at $112.42 OSP, and $110.30 in after-hours trading, down from its $113.50 the previous week. It fell farther than did WTI because it had farther to fall, and generally lags the New York benchmark in market consensus by about one week.

The back month contracts, oil for delivery in the more distant future, are contango, indicating a normal relationship with cash prices slightly below more distant delivery times and anticipating no real decline in market demand from its primary Asian customers.

The real story last week was in natural gas: the New York Mercantile Exchange's natural gas benchmark continued its decline, now being 40 per cent below its recent highs. This indicates that the Nymex gas benchmark reflects purely North American market realities, which are dominated by supply robustness and increasing production capacity additions expected in the future. The Nymex gas benchmark closed the week at $8.09 per million btu, down from $8.24 at the previous week's close. Contract prices are in contango, with more distant delivery times selling at a premium to most of the nearbys.

But what about the security of European gas supplies? Russia already controls about 25 per cent of that; if it annexes Georgia its lock on natural gas to Europe will strengthen.

Today, European nations, not to mention the Caucasus and the petroleum-rich states of the Caspian Sea region are feeling threatened. Natural gas prices in the European market could increase if Russian military forces are not fully withdrawn from Georgia.

The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.