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Abu Dhabi: With trading in New York shortened for the Independence Day celebration, Asian markets continued where New York left off, confirming the fundamental reality of the recent crude exponential price gains.
This gives some evidence that recent price gains are not just the result of US speculative money flowing in from underperforming equity and credit markets, but rather the result of supply-demand realities, particularly in Asia.
Unquestionably, crude price increases of the past eight weeks would not have been as dramatic had equity markets remained strong.
With commodity futures markets the "only game in town", hot money has flowed into crude futures markets in unprecedented amounts, distorting prices.
But this week's continued gains - even when US markets were closed - has tested their speculative money content.
Asian markets, eyeing fundamentals and fearing crude market shortages at current prices, continued to hammer the demand side, pushing WTI prices into record-breaking territory once again, even while most US traders were on the sidelines.
After-hour trading in Nymex crude nearby futures closed out the week at $145.29, a gain of $2.30/bbl for the week.
The qualified result is that speculation is not responsible for all the recent price gains in crude oil. Rather, markets are considering potential future realities and have concluded that future supply increases will be inadequate to cover expected demand increases; and that prices must therefore increase further, perhaps much further.
And no wonder: China steel demand is over 40 per cent of world demand while US demand has shrunk to a mere 10 per cent. More and more it is now China - not the US - that is the engine of world growth.
"Seek for knowledge, even unto China," reads the well-known Hadith.
The back months also gained this week, but not as much as the nearbys. WTI for delivery in 2015 closed the week at $142.08/bbl, a gain of $1.59. Last year at this time the Nymex WTI sold for $72.82/bbl, up over $2.00 from $70.69/bbl 53 weeks ago.
Local markets strongly higher.
Asian-bound local crudes gained more for the week than the WTI Nymex benchmark. The Opec basket ended the week at $137.73/bbl, up $6.96 for the week, well outpacing the WTI's $2.70/bbl weekly gain.
The benchmark DME Oman closed at the OSP of $140.86/bbl, and reached $141.20/bbl in after-hours trading, also strongly up for the week and based on Asian supply-demand realities, not speculation.
Natural gas gains
Nymex natural gas benchmark closed the week at $13.66/mmbtu, up from $13.19/mmbtu last week in spite of US inventory gains.
Being a regional marker the Nymex natural gas contract is extremely sensitive to US inventory changes. But inventory gains defied expectations and did not depress prices. This could possibly be an indication that NG markets are beginning to register a more intercontinental perspective.
In Russia, newly installed President Dimitry Medvedev is moving to require that only Russian flagged ships be allowed to transport Caspian basin natural gas. This must increase European nervousness over supplies. Can a natural gas producer cartel be far away?
The writer is an associate professor of Economics and Petroleum Market Research at the Petroleum Institute, Abu Dhabi.
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