Monday, March 10, 2008

Crude Oil Trades Near Record $108 as Returns Outpace Equities

By Mark Shenk

March 11 (Bloomberg) -- Crude oil traded near $108 a barrel in New York after rising to a record yesterday as investors bought futures because the returns have outpaced those of financial markets.

Oil in New York surged 80 percent over the past year as the S&P 500 and Dow averages dropped. China, the second-biggest oil- consuming country, increased crude-oil imports by 18 percent last month and halted overseas shipments to meet rising demand.

``Momentum coupled with sufficient fundamental underpinnings, such as the Chinese oil-import data for February, keeps propelling us,'' said John Kilduff, senior vice president of energy at MF Global Ltd. in New York. ``The grab for hard assets is on due to the lack of confidence in the rest of the markets at the moment.''

Crude oil for April delivery was trading 7 cents lower at $107.90 a barrel on the New York Mercantile Exchange at 9:34 a.m. in Sydney. Yesterday, futures rose $2.75, or 2.6 percent, to close at a record $107.90 a barrel. They earlier surged to $108.21 a barrel, the highest since trading began in 1983.

Brent crude for April settlement climbed $1.78, or 1.7 percent, to close yesterday at an all-time high of $104.16 a barrel on London's ICE Futures Europe exchange. Futures reached a $104.42 a barrel today, an intraday record.

Prices are heading to $120 ``in the short term,'' said Matthew Simmons, chairman of Simmons & Co., a Houston investment bank. ``I'm one of the few people who's not surprised to see crude at $107. I still think it's a bargain.''

Price Forecast

Goldman Sachs Group Inc.'s forecast for 2009 U.S. crude-oil prices was raised to $105 from $90 a barrel, in a report dated March 6. The Goldman oil equity analysts in London said that the increase was warranted because non-OPEC production is approaching a plateau while Asian economies spur consumption.

Lehman Brothers Holdings Inc. raised its first-quarter forecast for Brent and West Texas Intermediate crude-oil grades by 8 percent to $92 and $93 a barrel during the first quarter, in a report released on Feb. 29.

``The perception in the financial community is that the oil market is the one safe harbor,'' said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``The speculation that's moving oil higher will eventually undercut some of the safety they seek. As prices rise, the economy will weaken and eventually hit demand.''

Bets that May crude oil will fall below $90 a barrel were the most-actively traded options contracts on the Nymex yesterday. The put contracts, which represent the right to sell oil at that price, fell 25 cents to 46 cents, or $460 per contract, the lowest since at least November, according to data compiled by Bloomberg. One options contract is for 1,000 barrels of oil.

Fund Buying

``We're witnessing an ongoing flow of fund buying, which isn't particularly motivated by the particulars of the petroleum market,'' said Tim Evans, an energy analyst at Citigroup Global Markets Inc. in New York. ``Prices have rallied to such an extent where sellers have backed off. Any time prices go lower the buyers come right back into the market.''

Hedge-fund managers and other large speculators increased net-long positions, or bets on higher prices, in the week ended March 4, the Commodity Futures Trading Commission said.

``Clearly the fundamentals don't matter at this point,'' said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $4.5 billion energy-company bond portfolio. ``We've seen bubbles in other markets over the years and eventually they end. It's impossible to see when that will be the case here.''

U.S. crude-oil inventories rose 1.75 million barrels last week, according to the median of responses in a Bloomberg News survey. Stockpiles increased in seven of the previous eight weeks, Energy Department figures showed.

Justified Price

``The golden days of oil moving between $15 and $25 a barrel are clearly in the past, but it's hard to justify oil over $100, given the fundamentals,'' Mueller said. ``There are longer-term concerns about supply, which would justify a price in the $70s.''

Gold, platinum, wheat and soybeans have all been pushed to records over the past month as a falling dollar and rising demand spurred investor purchases.

The real price of gasoline is approaching the highs last seen in 1980, according to a Deutsche Bank report on March 7.

Last year, gasoline climbed about 40 cents a gallon from late winter into the driving season, which begins with the Memorial Day holiday in late May. If that happens from last week's level near $3.15 a gallon, prices will surpass the $3.41 a gallon peak set in March 1980, the report showed.

Gasoline for April delivery yesterday rose 2.06 cents, or 0.8 percent, to $2.7149 a gallon in New York, a record close. Futures touched $2.7325 on March 3, an intraday record for gasoline to be blended with ethanol, known as RBOB, which began trading in October 2005.

Pump prices are following futures higher. Regular gasoline, averaged nationwide, rose 0.7 cent to $3.222 a gallon March 9, AAA, the nation's largest motorist organization, said. Prices touched a record $3.227 on May 24.

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