PT: Dollar supports oil – and gives Opec something to ponder
OIL FUTURES are trading at their highest price in more than a year, as the weak dollar and more optimism about the prospects for the world economy sent front-month contracts in New York shooting past $80/b this week.
On Friday, the light sweet crude oil contract for December delivery was trading just shy of $81.50/b in New York. That was cheaper than the $82/b seen on Wednesday, but still leaves futures well above the $75/b Opec and other producers say is a "fair price".
There are some obvious sources of the momentum. China's economy grew by 8.9% in the third quarter, according to official statistics. That puts it well in line to exceed the country's 8% annual growth target – and assured bulls that the world's second-biggest oil consumer is out of the woods.
And the dollar is still weak. In the past week, it has lost about 1.2% against the euro. A slight firming of the dollar on Thursday and Friday, along with some gloomy economic data in the US, helped explain a softening in crude futures off the $82/b high, but the currency's long-term weakness still holds.
Eighty-dollar oil poses problems, however. First, as IEA boss Nobuo Tanaka said this week, a rapid rise in crude prices now could hamper the economic recovery. That is a worry for Opec. Its secretary-general Abdulla el-Badri says the group could start raising quotas if prices remain above $75-80/b. Already, he says, Opec members have restarted seven of 35 projects they put on hold while prices were falling.
That could make the cartel's next meeting, in Angola in December, a tricky one, because while market sentiment might be helping Opec, the fundamentals aren't on its side. The dollar still has room to fall and economies will keep improving in the coming months, says Deutsche Bank analyst Adam Sieminski, giving plenty of support to oil-market bulls. Yet inventory levels remain high, refiners in the US are struggling to make money, and producers could find themselves offering oil to "customers with no appetite for crude", he says.
Opec's quota discipline always falls as prices rise, and its ministers will be under pressure domestically to pump more crude if oil prices remain strong. They would do well to remain cautious, as the Opec secretariat has. Its view of global demand next year sees a 0.7m b/d rise, far more.
