Commodities | Aug 30 2006
By Greg Peel
This week has marked the anniversary of Katrina, and it is no surprise that constant reminders in the daily news do little but heighten anxiety every time red blobs appear over the Gulf in satellite images. This was the case when Ernesto dropped by to bare his teeth, and he provided added impetus to be long crude oil futures.
Ernesto’s bark proved worse than his bite, and there was a collective sigh around Nymex. In the meantime, Lebanon is no longer considered a flashpoint, and as Iran’s deadlines have been extended the scimitar-rattling has gone quiet over there as well.
A definite scenario for the erosion of risk premiums built into the oil price, beyond that of supply/demand fundamentals, and thus it’s no surprise the oil price has been drifting lower for a week.
Barclay’s Capital reports, however, that not only has oil fallen but it has done so with the help of pretty hefty liquidation of long positions in Nymex crude futures contracts. Net longs held by funds have fallen 14,900 lots to 68,900 lots – the biggest week-long liquidation since the May correction.
Gasoline futures have responded similarly, wiping out a lot of the “crack spread” that provides a premium over the crude price. As hurricanes are more likely to immediately affect gasoline prices than crude prices (reserves of crude can be released) then the premium has been running high since those Gulf waters started warming.
What? The hurricane risk is over?
Barclays is quick to remind that the hurricane risk is unlikely to diminish until well into October. We haven’t had Rita’s anniversary yet for starters. If oil is slipping on a relaxing of hurricane fears, then that is misguided.
If it’s slipping on a relaxing of Middle East concerns, then that’s fairly misguided too. The game is not over yet. The last time anyone looked it appeared Iran was still intent on going ahead with uranium enrichment.
Barclays suggests there may still be further downside, but that anything below US$68/bbl is getting silly. It won’t take much for any of those risk premiums to bounce right back again.