Bulls, bears line up for end-of-year showdown in energy futures

China (Platts)-- 20 Nov - 24 Nov 2006

World energy futures are set up for an end of year show down after a year of stabilization and slowly changing long-term sentiment.

Stockpiles of key energies like crude oil and natural gas still hovering at record highs, representing insurance against sudden supply-side shocks.

Producers, particularly those in the 11-member oil cartel OPEC, are doing what they can to prevent further builds, with demand growth slowing down to the lowest levels for several years around the world.

Consumers are diversifying away from oil and gas wherever possible, and only time will tell if those moves are destined to fundamentally change the energy futures markets--or if those moves are only to be quickly dropped as the serious challenges of relying on alternative energy supplies become more apparent.

Traders are divided over whether all this will amount to a collapse in values, or a rally. The markets could f course end in stalemate, although such a result would be the biggest surprise of all given the high level of volatility in the energy markets over the year 2006 as a whole so far.

The major energy futures contracts ended the week inconclusively last week, as is tradition when the US markets close for the Thanksgiving holidays.

By Wednesday's close, light, sweet crude futures settled at $59.24, a gain of 6% from the previous week's particularly weak close. But those gains were largely to do with opening of trade in a new front-month contract than any real new strength in the oil markets.

Other oil contracts, including those trading on ICE Futures in London all the way through to Friday, ended the week broadly unchanged or slightly weaker.

Natural gas in the US, by a wide margin the most volatile energy contract this year, ended last Wednesday down almost 6% at $7.718 per million British thermal units.

Direction of US dollar important in week ahead

Global crude futures may find strength in the week ahead thanks mostly to a weakening dollar, London brokers said Friday.

"The dollar is very weak at the moment and has pushed prices upwards," one London-based broker said.

The story of the weakening dollar was accentuated by the euro topping the threshold of 1.30 to the dollar for the first time in 19 months, rising to 1.3086 to the dollar on Friday.

The single European currency rose in early European trading Friday more than one percent over its mark on Thursday evening, hitting its highest level since April 21, 2005.

Another bullish factor supporting oil futures into the coming week was frequent militant attacks on facilities owned by Eni's Nigerian subsidiary Agip, causing December-loading delays at the Brass terminal.

Flow stations that feed the 200,000 barrels/day Brass crude export terminal have been shut down, resulting in a loss of around 55,000 barrels/day.

A source at an equity-holding company said that their December-loading cargoes will be deferred by a week and that there may be less Brass blend in January.

Created: November 27, 2006