Crude Oil Continues To Rally, But Why ?

WTI crude oil is trading at 106.31 gaining 34 cents in the morning session. Overall fundamentals do not support prices at this level. The EIA just weeks ago said that the average price of crude oil will be $93-94. Better than forecast data and global growth and recovery will increase the demand for oil but it should not push prices above the prices in 2006-2007 when global growth and demand was at record highs. Over the last few years, production of crude oil has risen to record highs, with the US becoming one of the world largest producers and exporter of crude oil.  WTI crude had jumped USD 1.15 in New York trade on Friday after China announced that its industrial growth accelerated in July to a five-month high of 9.7 per cent year-on-year. Brent rose 75 cents in London trade. Other figures, including steady expansion in retail sales and fixed asset investment, pointed to a more stable outlook for China’s economy — seen as a key driver of global growth — after months of mounting pessimism.

The United States government’s Energy Information Administration last week forecast that China would overtake the US as the world’s top net oil importer by 2014, fuelled by steady demand growth in the Asian economic powerhouse. WTI crude oil prices declined around 0.9 percent last week in taking cues from expectations that US Federal Reserve will reduce its bond buying program anytime in current year. Further, estimates that Libya will increase its crude oil production in next year also exerted downside pressure on prices However, decline in API and US crude oil inventories along with weakness in the DX cushioned sharp fall in prices. Crude oil prices touched a weekly low of $102.22 and closed at $105.97 at the end of last week. While the US dollar tumbled on Fed worries. The US dollar is trading at 81.27 this morning well below its recent average.

A strong rally in the price of U.S. crude in July coupled with a general improvement in the American economy has encouraged investors to return to energy exchange traded products (ETPs) after several months of outflows. Some $142 million was invested in energy ETPs in July, according to data from BlackRock, the world’s biggest asset manager. This follows outflows of $90 million in June, $48 million in May, $89 million in April and $423 million in March. By contrast, some $2.6 billion was withdrawn from gold ETPs in July while industrial metals ETPs lost $157 million. ETPs, whose value is linked to moves in their underlying assets, are an easy route into commodities for investors and allow asset managers to make swift tactical switches according to Vanguard.

On the supply side, the unexpectedly large drawdowns in U.S. crude oil inventories at delivery hub Cushing, Oklahoma in July, with strong demand from U.S. refineries helped send prices climbing. This kick started a rally in U.S. crude oil futures that saw prices rise by almost $9 a barrel in the month, to end July at more than $105 a barrel. The S&P GSCI Energy index was also up 7.1 percent in July. There has also been a lot of production coming offline in the Middle East and Africa, in Nigeria and Libya, and a significant reduction in Iranian exports, so there has been more of a bid in the energy complex than other parts of the commodity sector.

Natural gas is trading at 3.256 regaining 29 pips this morning as temperatures climbed in the US, helping to increase residential demand as summer begins counting down the number of days left. Natural gas futures declined to the lowest price in more than 5-months on NYMEX, on speculation that mild weather will widen an inventory surplus.