Crude oil prices hit fresh 17-month highs of over $87 per barrel earlier this week, but the rally lost steam Friday as futures contracts for May delivery slipped 52 cents to $84.87. Considering that prices were stuck in a narrow range for several months before the breakout, some traders doubt whether the advance was warranted, since the economy is far from optimal levels and oil inventories for the U.S., the world’s biggest consumer, are above five-year averages.
"The rise in prices was fueled by speculative positions" betting on an economic recovery, says Gene McGillian, an analyst with Tradition Energy in Stamford, Conn. "In the past year we got disappointing statistics that indicate the economy is not recovering at the rate [bullish traders] want."
While oil demand has indeed picked up in Asia, especially in China and India, it still lags in developed countries like the U.S., where overextended consumers and business have spent much of the past two years cutting back and tightening purse strings
The oil market is still in what traders call contango, meaning the outer month contract is more expensive than the front month, making it economically viable for a buyer to purchase the commodity now and store it for sale down the road. The May-June contango now stands at 70 cents, while the June-July contago has widened to 85 cents. Peter Donavan, vice president of Vantage Trading, expects the December 2010-December 2011 contango to widen from $1.40 to over $2, "an indication of ample supply and rising concerns about demand."
Despite the uncertain demand picture, U.S. refinery utilization is creeping higher, up to 84.5% in the latest weekly gauge from the Energy Information Administration. That remains below the historical average of 86.9% for this time of year though, leading many to believe there is enough slack in the system to offset any increase in demand associated with an economic recovery. It's also worth noting that the refinery market is not very disciplined, and we might see too much product brought to markets, says Ann Kohler, managing director at Caris & Company in New York. "We are not going to see the strong market rebound from 2000."
On Thursday
Chevon, which is due to report April 30, gained 1.9% to $79.18 Friday. Fellow integrated oil players were also trading in positive territory.
Oil prices were also pressured down by a slight rebound in the dollar against the euro after Fitch Ratings downgraded Greek sovereign debt from BBB+ to BBB-. A higher dollar makes oil more expensive for holders of other currencies.