New record highs raise the specter of a 'super spike' in prices

China (Platts) -- May 5-9, 2008

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

Global crude prices continued their relentless march to new record highs last week, begging the question of whether we may be on the verge of a super spike. After posting new highs on Tuesday and Thursday at $121.84/barrel and $123.69, respectively, front-month WTI crude oil prices closed at an all-time high of $125.96 on Friday. Looking at the charts, the next upside objective appears be $127.50, which would likely be only a minor resistance level, according to technical analysis by Platts Futures Managing Editor Linda Rafield. The next significant resistance level would be $131.00.

Tightness in the distillates market led the surge in energy futures. Heating oil futures on NYMEX settled at a record $3.6360/gal last Friday, up 12.62 cents on the day. Front-month gasoil on ICE also settled at an all-time high of $1,192.50/mt for a gain of $38.75/mt and subsequently rallied above $1,200/mt for the first time. News that Hovensa shut down its 500,000 b/d crude distillation unit at its St. Croix refinery accelerated the rally, but steep gains had already been registered without any news headlines to spur the charge higher. The loss of production at one of the world's largest refineries was thought to jeopardize the movement of up to four arbitrage cargoes of ultra low sulfur diesel that were expected to be delivered into the European market, a trader said.

How high will prices go?

Earlier in week, US investment bank Goldman Sachs said the possibility of $150-$200/barrel oil seemed "increasingly likely" over the next six months to two years, or from late 2008 to mid-2010. Goldman Sachs famously predicted that prices would break the $100 threshold last year. In its most recent forecast, the company cited "struggling" non-OPEC supply growth, tight capacity in OPEC, constraints on foreign investment in oil-producing countries, and healthy non-OECD demand.

Indeed, news emerged last week that production in Russia, one of the largest non-OPEC producers, fell year-on-year for the fourth consecutive month in April to 9.68 million b/d. In addition, a Platts survey last week showed that OPEC crude production was sharply down in April at 31.87 million b/d, a 350,000 b/d drop from March, largely as a result of steep output losses in Nigeria because of ongoing political unrest and recent headline events there.

Goldman Sachs said in its report, "We believe the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent and resulting in needed demand rationing in the OECD areas, in particular the US." The energy analyst team, headed by Arjun Murti, raised its average annual price estimates for the years between 2008 to 2011 to $108, $110, $120, and $120, respectively. Compared to the company's previous forecast, the new trend line shows prices rising more slowly from 2008 to 2009, but more quickly to 2010, when they are expected to peak out.

Adding to the momentum of Goldman Sachs' outlook were statements by the IMF and the US Energy Information Administration that painted a similarly bullish picture of things to come.

The IMF said May 8 that recent price increases in energy and commodities were likely to prove "durable" because the factors driving them appeared to be "fundamental in nature." John Lipsky, the IMF's first deputy managing director, in remarks to the US Council on Foreign Relations in New York, said emerging and developing economies had accounted for about 95% of oil demand growth since 2003 and that "the prospect of continued relatively strong growth in these economies suggests that demand growth for energy and commodities will remain solid, even as global growth is slowing."

At the same time, he said, "the supply response to rising prices has been disappointing." He pointed out that oil supply projections had routinely been revised downward in recent years, particularly for non-OPEC producers, and that costs associated with new capacity investment had increased significantly, from about $5/barrel in 2000 to $10/b in 2007. "As spare capacity and inventories have dwindled, the oil market has become highly sensitive to news of supply disruptions and geopolitical events," Lipsky said.

The chronically weak dollar also appeared to influence commodity prices, he said. "For example, IMF estimates suggest that if the US dollar had remained at its 2002 peak through end-2007, oil prices would have been $25/b lower and non-fuel commodity prices 12% lower," he said.

Lipsky suggested that consumers may have to adjust to paying high prices for energy. "Does the increase in energy and commodity prices represent a durable relative price shift, reflecting long-lasting global demand and supply trends? If this is the case, we all will just have to get used to paying relatively higher prices for these items," he said.

Meanwhile, the US EIA raised its 2008 forecast for WTI crude from $100.61/barrel to $109.53. Moreover, in a sign that high prices may be starting to erode demand, the EIA also forecasted a sharp drop in US consumption this year. EIA's new price projection for WTI for the second quarter is $112.19/b, compared to $103.67 in last month's outlook. The agency's WTI price projection for both the third and fourth quarters is $114/b, compared to the $102 and $98.83 projected last month. WTI averaged $72.32/b in 2007.

The EIA also projected global oil demand to average 86.61 million b/d in 2008 and 87.95 million b/d in 2009, upward revisions of 30,000 b/d and 60,000 b/d, respectively, from the April report. "Almost all of the growth in 2008 is expected to come from non-OECD countries, led by China, Middle East oil producing countries, and Russia, as well as Brazil and India," the EIA said. The agency is projecting Chinese oil consumption to rise by 400,000 b/d in 2008 to 8 million b/d. European oil consumption growth is expected to offset the declines in the US.

Updated: May 12, 2008

Return to top

The weekly Platts Futures & Derivatives Review offers independent analysis--both fundamental and technical--of energy and financial markets, grounded in years of Wall Street experience.