By Dian L. Chu, Economic Forecasts & Opinions
Crude oil surged to its highest level in almost eight weeks and gasoline also rose to a 17-month high after U.S. employment declined less than forecast in February. Encouraged by the upbeat news, investors moved into oil on the expectation that fuel demand will climb as economic growth picks up pace.
Extending the impressive gains of 9.3% in February, crude oil for April delivery settled at $81.50 a barrel on the New York Mercantile Exchange (NYMEX), the highest closing price since Jan. 11. The contract jumped 2.3% in last week alone.
Positive statements from China that it would maintain its economic stimulus, rekindling hopes for accelerating growth to drain excess oil supplies also helped support the oil market.
Moving On Up Via Currency?
New York crude has been trading in the $69-$83 range since late September as uncertainty over the global economy has contributed to several failed rallies. The close above $81, capping a 14.5% increase from a year-to-date low last month, sparked speculation that oil could be targeting $85 in the near term.
Now, some traders and analysts say currency movements may play an important role in pushing prices beyond those limits.... or will they?
Breaking The Dollar Rule
Much of the movement in oil over the past year was driven by overall fund flows out of the U.S. dollar as opposed to supply and demand fundamentals of the commodity. Dollar weakness tends to boost dollar-denominated commodities, which has characterized the relationship between crude and the dollar for most of last year. (Fig. 1)
However, just as the Greece debt crisis negatively impacted the euro pushing gold and the US dollar to trade in tandem (see analysis), the dollar's no longer in the driver's seat dictating the direction of crude prices, as crude and the dollar have both advanced since last December. (Fig. 1)
This break in the pattern suggests this year could be a transition where broader market fundamentals begin to take hold, with weekly inventory levels and demand trends becoming a larger factor for the energy market.
Down The Contango Spread
Meanwhile, the forward curve has flattened out considerably. The spread between the near-month oil in relation to the 12-month forward contract has dropped from $8.32 per barrel three months ago to the current level of around $2.50 per barrel (Fig. 2).
Tanked The Floating Storage
This narrowing of the contango spread is reflected in the tankers market as well. Since storing oil has actually become less lucrative in recent months, estimates show that floating inventories have been falling just as demand picks up.
Though the floating storage data is sketchy at best, Bloomberg reported the number of tankers used as floating storage for crude oil and diesel fell 20% in January, based on a Feb. 8 report from Simpson, Spence & Young Ltd., the world's second-largest ship broker.
