Oil fired up for an assault on $150 level

Oil prices roared to a fresh record above $147 a barrel in intraday trade yesterday. But as momentous as the fact that the price is now threatening to reach the $150 landmark has been the extraordinary volatility in prices.

US crude on Tuesday recorded its largest one-day dollar decline – $5.33 a barrel – since the start of the first Gulf war in January 1991. Thursday saw the second largest one-day dollar gain – $5.60 – since crude futures started trading in the 1980s, forcing any bears who were rash enough to bet on a deeper correction to close out their short positions.

“The volatility that we are currently seeing in oil prices is among the highest ever recorded,” said Mike Wittner, global head of oil research at Société Générale.

ICE August Brent hit $147.50 a barrel in intraday trade, before ending the session at $144.49, up $2.46.

Nymex August West Texas Intermediate surged $5.62 to an intraday peak of $147.27 a barrel yesterday, before easing back to $145.08, up $3.43.

Renewed geopolitical tensions and supply concerns have forced a stunning rebound for the oil market in the last two days.

Crude prices were down by more than $10 early in the week with WTI dropping to $135.14 a barrel on Tuesday

Buying interest was rekindled by the abandonment of a ceasefire by militants in Nigeria – who were apparently responding to a British offer to stabilise regional unrest. There were geopolitical concerns following a series of long-range missile tests by Iran (and continued talk of a strike by Israel on Iran’s nuclear facilities) as well as the threat of a strike by workers at Petrobras that could potentially shut 80 per cent of Brazil’s 1.8m barrels a day of production.

This week’s reversal echoes price action in June when a fall in oil prices proved a bear trap following the ECB’s surprise warning that it would raise interest rates. This prompted the euro to rally strongly against the dollar and pushed oil prices up by more than $10 as traders hastily covered short positions.

“The swings in the market’s mood really have been remarkable, especially as the evidence of demand destruction in the US has become clearer and macro-economic data have continued to deteriorate,” said Edward Meir of MF Global.

Mr Meir said the ending of the ceasefire by militants in Nigeria had “justifiably raised concerns of renewed disruptions to oil flows after a relatively tranquil couple of weeks that allowed Nigerian exports to rise to respectable levels”.

Oil prices also found support from weakness in the dollar which sank towards record lows against the euro, prompted by fears that Fannie Mae and Freddie Mac, the key US mortgage institutions, could require a government bail-out.

Some traders argued that the dollar was likely to come under further pressure as the Federal Reserve would find its ability to use interest rates to battle commodityrelated inflation pressures severely constrained by the increased threat of systemic failure across the financial markets.

Given the weakness in equity markets and accompanying declines in risk appetite, the continued rise in oil prices could further inflame the already heated debate among US lawmakers over the influence of speculators in energy markets.

Meanwhile, Saudi Arabia’s promise last month to increase its supplies to the highest levels for 30 years has failed to cool the market as poor profit margins for refiners, particularly in Asia, means there has been little demand for the kingdom’s medium and sour heavy grades of crude.

On Friday, Qatar’s oil minister said he saw no demand for the additional crude that Saudi Arabia has pledged to provide.

Francisco Blanch, commodity strategist at Merrill Lynch, has highlighted the lack of flexibility in the global refining system, leading to limited supplies of transportation fuels, such as diesel and jet fuel, as a key problem for global energy markets.

Yesterday, ICE August gas oil hit a record $1,339.25 a tonne, up almost 60 per cent this year. The strength in crude and gas oil prices also spilled into product markets with both US petrol and heating oil prices reaching record levels.

Nymex August heating oil reached $4.1586 a gallon, up 57.3 per cent this year, while Nymex August RBOB unleaded gasoline hit $3.6310 a gallon, taking the gains for the year to 46.7 per cent.

US demand for petrol has sunk to its lowest level since 2003 in the face of record pump prices above $4 a gallon.

Growing numbers of drivers in southern California are reported to be crossing the border into Mexico to fill their tanks with cheaper supplies and railway passenger numbers have increased as motorists abandon their cars and take to the train.

Adam Sieminski of Deutsche Bank said rising demand in China was offsetting falling oil demand in the US and Europe.

Paul Horsnell, of Barclays Capital, added that the weakness of US demand had “been the primary reason that non-Opec supply weakness has not yet led to a full-scale oil price shock”.

Mr Horsnell warned that downward revision to forecasts for supply growth in 2009 for Russia, Mexico and Norway had left prospects for non-Opec supply growth looking “alarmingly weak”.

Barclays said that if US consumption started to look rosier, oil prices would rise further but if demand eroded, then the market’s worst fears could be avoided.