Crude-oil futures climbed to another record level above $80 a barrel Monday, overcoming earlier weakness as traders fretted about near-term risks to global supplies and bet that a Federal Reserve cut in interest rates will help lift energy demand.
"The market is gaining confidence that a Fed rate cut will be a good omen for further energy demand," said Phil Flynn, senior analyst at Alaron Trading. Federal Open Market Committee policymakers will meet Tuesday. Among Fed watchers, prospects for a rate cut are regarded as a virtual certainty.
Market economists mostly believe the central bank will cut the federal funds rate by a quarter of a percentage point, to 5%. It would be the first U.S. rate cut since June 2003. On the New York Mercantile Exchange, crude for October delivery tacked on $1.47 to close at $80.57 a barrel, a gain of 1.9%.
Lingering doubt
In addition, OPEC Secretary General Abdalla el-Badri said on Friday that $80-a-barrel oil is unsustainable in the current market. Unless a fresh weather threat develops in the Atlantic Ocean, oil prices could see a correction ahead of Wednesday's Energy Department update on petroleum supplies, according to Michael Fitzpatrick, an analyst at MF Global.
"But we also think that there are enough supply issues ahead to leave the market's larger uptrend intact," he said in a note to clients.
So while Alaron's Flynn considers it "more than likely" that oil prices will reach $85 before the end of the year, he also admits that based on how the technical charts look, "it would take much for us to reach our objective."
For now, prices for the petroleum products only managed modest gains. October reformulated gasoline added 0.78 cent to close at $2.0442 a gallon, while heating oil for October delivery added 2.09 cents to end at $2.2287 a gallon.
Natural gas rallies
October natural gas stood out from the pack Monday, rising 37.4 cents, or 6%, to close at $6.653 per million British thermal units, its strongest level since Aug. 17.
The strength in natural gas is "surprising since Tropical Storm Ingrid has been reduced to a depression and the weakening system is not likely to threaten Gulf infrastructure," said Fitzpatrick. "The market is still faced with high supplies and slack cooling and heating demand," he said.
The stocks weak as oil rises
Energy stocks were mixed Monday despite a new intraday record of $80.50 a barrel for crude oil futures, as traders weighed a bullish outlook for petroleum against jitters over the economy on the eve of an expected Fed rate cut.
The Amex Oil Index (XOI:1,406.04, -3.88, -0.3%) fell 0.3%, with Exxon Mobil (XOM:89.32, +0.65, +0.7%) , part of the Dow Jones Industrial Average, rising 0.6% to $89.22. Marathon Oil (MRO: 56.44, +0.54, +1.0%) rose 1.4% and Chevron Corp. (CVX: 90.96, +0.31, +0.3%) gained 40 cents to $91.01. In the energy pits, the benchmark crude futures contract touched a record of $80.50 a barrel.
"The market is gaining confidence that a Fed rate cut will be a good omen for further energy demand," said Phil Flynn, senior analyst at Alaron Trading. Federal Open Market Committee policymakers will meet Tuesday. Among Fed watchers, prospects for a rate cut are regarded as a virtual certainty. Market economists mostly believe the central bank will cut the federal funds rate by a quarter of a percentage point, to 5%. It would be the first U.S. rate cut since June 2003. On the New York Mercantile Exchange, crude for October delivery tacked on $1.47 to close at $80.57 a barrel, a gain of 1.9%.
The contract had dropped to a low of $78.80 early in the session but then rebounded as high as $80.70 -- a level never before seen on the exchange for a front-month contract. On Friday, crude oil fell 99 cents at $79.10 a barrel, backing off Thursday's previous record-high close of $80.09. The contract rose as high as $80.36 in electronic trading Friday.
Goldman Sachs said its analysts raised their year-end forecast for oil prices to $85 a barrel for 2007 and pegged the year-end price at $95 a barrel for 2008. "Near term, they believe the risk of oil breaching $90/bbl is high," according to a research note released Sunday by the brokerage. Goldman has long envisioned a so-called "super spike" as being in the cards for crude prices.
"The core drivers of our analysts' long-standing super-spike framework remain firmly intact: spare capacity throughout the oil value chain remains limited, supply is struggling to grow, and demand growth continues," the note said.
Lingering doubt
By the same token, the argument in favor of higher crude prices is hardly universally subscribed to. "Last week's rally has been quite remarkable in that it has been greeted by quite a lot of skepticism by many," said Edward Meir, analyst at MF Global, in a research note.
"Last week, for example, Rex Tillerson, chief executive of Exxon Mobil said he did not think $70 oil was justifiable, a reasonable observation, but only five trading days later, that level now looks positively cheap," Meir said.
In addition, OPEC Secretary General Abdalla el-Badri said on Friday that $80-a-barrel oil is unsustainable in the current market. Unless a fresh weather threat develops in the Atlantic Ocean, oil prices could see a correction ahead of Wednesday's Energy Department update on petroleum supplies, according to Michael Fitzpatrick, an analyst at MF Global.
"But we also think that there are enough supply issues ahead to leave the market's larger uptrend intact," he said in a note to clients.
So while Alaron's Flynn considers it "more than likely" that oil prices will reach $85 before the end of the year, he also admits that based on how the technical charts look, "it would take much for us to reach our objective."
For now, prices for the petroleum products only managed modest gains. October reformulated gasoline added 0.78 cent to close at $2.0442 a gallon, while heating oil for October delivery added 2.09 cents to end at $2.2287 a gallon.
Natural gas rallies
October natural gas stood out from the pack Monday, rising 37.4 cents, or 6%, to close at $6.653 per million British thermal units, its strongest level since Aug. 17.
The strength in natural gas is "surprising since Tropical Storm Ingrid has been reduced to a depression and the weakening system is not likely to threaten Gulf infrastructure," said Fitzpatrick. "The market is still faced with high supplies and slack cooling and heating demand," he said.
Beth Sewell, managing partner at Quantum Gas & Power Services, said there's a tropical wave south of Hispaniola that could track into the Gulf of Mexico later this week. "That's about all I can see to create excitement," she said.
In Monday's trading in energy equities, oil and gas stocks traded mostly lower, reflecting a decline among the broader stock market. The Philadelphia Oil Service Index ($OSX: 280.29, -3.09, -1.1%) saw the biggest decline.
Elsewhere on the commodity markets, gold futures climbed to their highest level in at least 16 months. Taking a broad measure of the commodities markets, the Dow Jones AIG Commodity Index (26099104:174.54, +2.21, +1.3%) was up 1.3% at 174.52 points.
Energy stocks were mixed Monday despite a new intraday record of $80.50 a barrel for crude oil futures, as traders weighed a bullish outlook for petroleum against jitters over the economy on the eve of an expected Fed rate cut.
The Amex Oil Index (XOI:1,406.04, -3.88, -0.3%) fell 0.3%, with Exxon Mobil (XOM:89.32, +0.65, +0.7%) , part of the Dow Jones Industrial Average, rising 0.6% to $89.22. Marathon Oil (MRO: 56.44, +0.54, +1.0%) rose 1.4% and Chevron Corp. (CVX: 90.96, +0.31, +0.3%) gained 40 cents to $91.01. In the energy pits, the benchmark crude futures contract touched a record of $80.50 a barrel. Goldman Sachs has upped its oil price outlook to $85 a barrel by the end of 2007 and to $95 a barrel for 2008, according to a note published Sunday. Analysts forecast a high risk of a near-term spike in the price of oil over $90 a barrel.
Meanwhile, the Amex Natural Gas Index (XNG:502.34, -0.38, -0.1%) rose fractionally. The Philadelphia Oil Service Index ($OSX: 280.14, -3.24, -1.1%) fell 0.8%, with shares of Baker Hughes (BHI: 85.75, -1.32, -1.5%) off 1.5% and Noble Corp. (NE: 46.44, -1.86, -3.9%) down 3%.
Brian Hicks, co-manager, US Global Resources Fund (PSPFX: 17.74, 0.00, 0.0%) said it may be too soon to predict oil prices of $85 a barrel right now, but sees lower supplies supporting higher prices ahead.
"First we have to see how the market absorbs $80 oil, whether it chokes off demand," Hicks said in a statement to MarketWatch. "A big wild card is 'Are we going into a recession?' We don't see that - global demand is strong and that has been driving price. On top of that, OPEC has been doing a good job managing price this year through the timing of its production cuts and increases."
Rising global demand and a drop in supplies could fuel higher prices going forward, he said.
Via|MarketWatch|by Steve Gelsi| and Myra P. Saefong & Polya Lesova Found this post useful? Consider subscribing to
