WTI delivery point problem influences oil price

Commodity markets traded mixed this week with the CRB index falling by four per cent over the week primarily influenced by another negative week in the energy complex.

WTI crude oil had another bad week with continued focus on falling demand and the ever-increasing contango between spot and forward months. February crude made new lows ahead of the expiry on January 20 and was driven by rollover pressure from long only index funds plus hedging of excess crude that could not find a home. The spread between February and March were under pressure all week rising to $8 (Dh28) by Friday which represents a premium of 24 per cent.

The carry trade that has been mentioned a lot recently continues and one analyst now estimates that 80 million barrels of oil is on floating storage, almost enough to supply the whole world for one day. Oil traders are scrambling to lock in the huge spreads between spot and forward. It is now possible to buy crude for spot and sell it back out in six months time at a near 60 per cent premium, after cost of storage, insurance and funding that still leaves a handsome profit.

The very low prices can also be attributed to the storage problems at Cushing, Oklahoma, which is the delivery point for WTI crude. After another build in US weekly storage, Cushing is now storing 33 million barrels which is very close to the available capacity of 34 million barrels.

This local problem is having a global impact on the pricing of oil. An example is the North Sea Brent Crude which traditionally should be trading $1.5 lower than WTI crude due to its inferior quality. This week spot Brent at one stage traded $11 above WTI crude. Many are therefore turning to Brent as a more accurate barometer of global market conditions.

So where are we heading? The forward curve is pointing towards the mid-50s within the next three to six months which could be realized if Opec sticks to its promised output cuts. However, the demand slump will probably continue to drive markets near term and we cannot rule out seeing $25 before the turn. As long Cushing remains close to full, the spot month will continue to be under pressure which is not good news for the March future which becomes spot month on Tuesday.

Technically the March crude contract is trading in a wide $37 to $54 channel with main risk still to the downside. Look out for selling against forward months next week once March becomes front month.

GOLD

Gold had a mixed week breaking down though $831 on Monday, finding support at $800 before rallying strongly into the weekend as the global financial situation deteriorated once again.

As mentioned before, one of the main drivers going forward will be the value of the dollar. What I have found over the past few weeks is the incredible difference in opinion about the direction of the dollar in 2009. Some, including us, are looking for a substantial strengthening of the dollar near term while others are looking for the Euro to move back above 1.50. Gold will be stuck in the middle of this tug of war and the outcome is really difficult to predict.

Technically tough resistance will be met at $863 which is 200 day moving average and $879 being the trend line from the July 2008 highs. Below $831 support is found at $800 followed by $790.


GRAINS

US grain markets saw an abrupt turnaround on Monday when the United States Department of Agriculture came out with higher than expected surplus forecast for corn and soybeans. This caused the market to drop quite heavily.

Corn traded limit was down after the report estimated that unsold harvest will be 21 per cent higher than expected one month ago, due to lower demand from livestock and ethanol producers. These areas are highly correlated with the ongoing recession and the continuing low crude prices have a high influence especially for the alternative energies. We still remain positive for the agricultural sector and see it as one of the few bright spots in the commodity arena for 2009. With the new US administration in place soon and with its perceived pro-biofuel stance we expect continued support for the expansion of ethanol use.

Prices recovered late in the week as the attention returned to the drought in Argentina with officials issuing a "severe water deficit" warning. Soybeans and Corn lead the recovery as an Argentinean official stated that damage to the soybean crop may be much worse than previous predicted. Soybeans futures for March delivery looks interesting above $990.

We recommend trading the market from a long perspective with a stop below $960.

- The author is Manager for Futures and Fixed Income at Saxo Bank