Closure of Strait of Hormuz

Energy analysts say even a partial closure of the Strait of Hormuz could raise the world price of oil within days by $50 a barrel or more, and that would quickly push the price of a gallon of regular gasoline to well over $4 a gallon.

“You would get an international reaction that would not only be high, but irrationally high.” said Lawrence J. Goldstein, a director of the Energy Policy Research Foundation.

Just the threat of such a development has helped keep oil prices above $100 a barrel in recent weeks despite a return of Libyan oil to world markets, worries of a European economic downturn and weakening American gasoline demand.

Both Brent and WTI oil prices rose slightly on Thursday as the political tensions intensified.

US and China Alliance

Analysts say that a crisis over the Strait of Hormuz would most likely bring China and the United States into something of an alliance to restore shipments, although Mr. Goldwyn said China would more likely resort to private diplomacy instead of military force.

Europe and the United States would probably feel the least direct impact because they have strategic oil reserves and could get some Persian Gulf oil through Red Sea pipelines. Saudi Arabia has pipelines that could transport about five million barrels out of the region, while Iraq and the United Arab Emirates also have pipelines with large capacities.

But transportation costs would be higher if the strait were blocked, and several million barrels of oil exports would remain stranded, sending oil prices soaring.

Oil Price Forecast – 2013

The bank forecasts the price of Europe’s Brent oil for 2013 to average out at $121.25 per barrel and forecasts the 2013 average WTI oil price at $114.25 per barrel.

“Our analysis suggests that supply constraints will again be reached by the end of 2013, driving a quarterly rise in our ICE Brent price forecast to $130 per barel.” it said.

Oil Price Forecast – 2012

JP Morgan has maintained its price projection of $115 a barrel for Brent crude oil, and $97.50 a barrel for WTI through 2012.

Earlier this week, Goldman Sachs cut its 2012 Brent crude oil price forecast, on growing worries that the European financial crisis would restrain economic growth and curb global fuel demand.

Goldman Sachs trimmed its 2012 Brent oil price estimate to $120 a barrel from $130 and cut its forecast for US WTI crude oil price to $109 from $123.50.

Goldman Sachs had the highest Brent 2012 forecast of $130 a barrel a recent monthly oil poll, well above an average of $106.80 a barrel expected in 2012.

JP Morgan – Top Oil Stock Picks

Meanwhile, JP Morgan has adopted a more positive stance toward the major US oil producers sector, while also upgrading several stocks within the sector in a research note released on Thursday.

Within the integrated oils sector, JP Morgan’s top picks are Nexen, Hess, Talisman Energy and Occidental Petroleum. The bank’s analysts think these companies offer the most attractive combinations of upside to price targets, downside protection, upcoming catalysts and growth in production.

“We stress that we would not short these names, but we would lock in recent outperformance, as we believe they have less to offer than the peers in terms of share price performance, underlying growth and valuations appeal in the near term.” the report said.

Latest Brent Oil Price

In London, Brent crude oil futures for August 2011 delivery was trading at $116.77 a barrel, 09.45 GMT this morning on the ICE Futures Exchange.

ICE US Dollar Index

Meanwhile, the ICE US Dollar Index, which tracks the US dollar against six major world currencies was trading back at 75.965, clearly showing some strength as the euro debt situation continues to play out.

Oil prices and other commodities fall as the US dollar gains, as oil futures are priced in US dollars, making them more expensive for buyers using other currencies when the dollar is stronger.

Some anaylsts are betting on a big move higher for the US Dollar Index. The index has a major resistance at the 76 mark, however if this level is breached, the Dollar Index has a potential to touch 78 in the immediate term, which would have oil prices tumbling lower again.

Brent Oil Futures – Closing Price

Brent crude oil futures for June 2011 delivery ended the week’s trading session at $124.04 a barrel on the ICE Futures Exchange yesterday evening, $0.60 higher than last week’s closing price of $123.44 a barrel. All main markets are closed today for the Easter holidays.

Uncertainty With Traders – Go Long

“We went out on a strong note. Guys are not too crazy about going home short this weekend, because who knows what could happen.” said Peter Donovan, vice president of Vantage Trading, New York.

US Dollar Heads Lower – Oil Prices Gain

Meanwhile, the US dollar had a tough time this week, as seen by downward movements in the ICE US Dollar Index. The ICE Dollar Index, which track the US dollar against six major world currencies ended the week back near 74, at levels not seen since the summer of 2008.

“The major component that oil traders are watching right now is the US dollar and the dollar is getting decimated.” said Rich Ilczyszyn, commodities broker at Lind-Waldock, New York.

A weaker US dollar is positive for oil prices and other commodities as it makes them cheaper for buyers using other currencies.

Latest WTI Oil Price

US Light crude oil futures for March 2011 delivery was trading as $87.39 a barrel, 08.15 GMT this morning on the NYMEX.

WTI to ICE Brent Spread at Record Highs

ICE Brent rose 60 cents to $100.52 a barrel at 07.10 GMT this morning, with US Light crude oil futures firm over $87 a barrel, the spread between the two benchmarks widened to nearly $13 a barrel.

“Constraints in North Sea supplies will continue to cause the spread between the two benchmarks to be quite wide.” said Ben Westmore, analyst at National Australia Bank, Melbourne.

North Sea Forties crude oil supplies are slightly tighter for March. So far, around 793,000 barrels per day are seen for March loading, down from around 850,000 bpd scheduled for February.

With those figures in mind, together with the ongoing protests in Egygt, it would be logical to assume that Brent oil prices are trading with a “priced in” fear factor of under supply in the near term, while in the US, WTI oil inventories are expected to remain well stocked.

However, US crude oil stocks unexpectedly fell 558,000 barrels last week on sharply lower imports, the US API (American Petroleum Institute) reported on Tuesday.

WTI Oil Futures – Closing Price

US Light crude oil futures for March 2011 delivery ended the week at $89.30 a barrel on the NYMEX, after several straight day’s of declines, but still $0.19 a barrel higher than last week’s closing price of $89.11.

WTI Oil Price Undervalued

In our article yesterday about the recent sell off in WTI oil futures WTI oil price suggests it’s undervalued WTI crude shot up four and a half percent, one of the biggest daily gains since the oil price spike in the summer of 2008.

Egypt Tensions – Middle East Oil Supply

One of the main factors for WTI’s gain on Friday came out from unrest in Egypt, which could possibly affect Middle Eastern oil supplies.

Recent unrest in Tunisia over rising food prices and high unemployment have also left many people Egypt feeling frustrated and resentful of their leadership.

At least 26 people were killed and more than 1,100 hurt in Egypt yesterday as protesters and security forces clashed during an anti government “Day of Wrath”.

Meanwhile, Egypt’s president Hosni Mubarak dismissed his government and said a new cabinet would be announced later on Saturday.

View Egyptian Protests in a larger map

Egypt – No Internet, No Mobile Phones

Mubarak ordered his troops and tanks into major cities, expanded a night time curfew across the country and dropped a digital blanket of silence by having Egypt’s small number of Internet providers cut off all services after midnight on Thursday. Mobile phone services in Cairo also went dead.

Somehow it look’s like the Egypt issue is far from over and oil prices are set to trade higher next week, with WTI now firm near $90 a barrel, and Brent oil futures primed to trade back over $100 a barrel for the first time since 2008.

2010 – A Year of Rising Oil Prices

WTI oil prices are around 15 percent higher today than they were on 1st January 2010, and Brent crude oil futures are more like 20 percent higher still ( see 1st January 2010 article here ).

Although 2010 has seen crude oil prices take on year highs and lows, it’s clear that the world economy continues to re-shape, and in turn, global oil demand is now a main driver of oil prices.

BP Oil Spill of 2010

The BP oil spill disaster that started in April of 2010 saw oil prices jump higher ( the first of many BP oil spill articles, here ) however oil prices are now even higher than at any point in the year.

Many analysts believed that the BP oil spill would have a long lasting effect as oil demand all over the world remains tight, if not in reverse at this point (less oil available than oil demand itself).

But the BP spill was finally contained, with little effect on the downside in short term oil prices. So, what’s driving oil prices back near the $100 mark?

Currency Markets in 2010 and the US Dollar

The ICE US Dollar Index is a great way to track short term oil price movements as oil futures and other commodities are priced in dollars, hence, if the dollar weakens, oil prices tend to move higher.

Did you know that the US dollar Index was actually lower, this time last year than today? Here’s the full 2010 US Dollar Index chart:

As the chart shows, the US Dollar Index opened 2010 at 77.909, which is around 3 percent lower than todays 80.201. However, oil prices are much higher today than a year ago.

Brent oil prices opened 2010 at $77.93 and is today currently at $93.81 a barrel, 13.00 GMT on the ICE Futures Exchange. That’s an increase of around 20 percent higher than a year ago. There’s a big difference in 3 percent and 20 percent, which tends to mean other factors are at work, driving oil prices higher.

Oil Price Forecast for 2011

Goldman Sachs, JP Morgan and other large banks are forecasting higher oil prices in 2011. In fact, it’s hard to find any trader or analyst that expects oil prices to head lower anytime soon.

Our point of view is that oil futures will remain bullish and may well see $100 a barrel in the first trading week of January 2011 (forecast for Brent oil, as traded on the ICE Futures Exchange).

As for oil prices into the spring and summer of 2011, we forecast that oil prices will go higher than this. Here’s why:

1: Global Oil Demand is Higher than Oil Supply
2: There is another Bubble Emerging in the Oil Market

Of course, many short to medium term situations over the world could change this view (Middle East or Asian Conflicts) but most of the potential situations would only make oil prices go even higher.

The only way oil prices would see a big fall in 2011 would be if the US dollar makes a massive recovery, back to the 90 – 100 level.

Our forcasts for oil prices into 2011 are:

January 2011 – $100 oil
April 2011 – $110 oil
July 2011 – $130 oil
October 2011 – $150 oil

Feel free to add your comments below.

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Latest Brent Oil Price

In London, Brent crude oil futures for January 2011 delivery was trading at $85.30 a barrel, 07.30 GMT this morning on the ICE Futures Exchange.

The ICE Dollar Index, which measures the US dollar against a basket of six major world currencies, fell to 78.589.

Focus Back on China

Oil prices may see some resistance over possible price controls for energy products in China, aimed at slowing the country’s soaring inflation. However, the Chinese government offered few specifics and did not say that price caps would be imposed on any specific products.

Possible tightening of monetary policy in China, may lead to a drop in crude oil demand.

Euro Bailout Talks Fuel Oil Prices

Oil prices erased recent losses yesterday as the US dollar dropped against the euro, fueling the appeal of commodities including oil and gold as an alternative investment. Brent oil prices ended trading over two percent higher yesterday after Ireland’s central bank governor said he expects the country to seek help.

“Market direction is still uncertain even though the sovereign debt risk in Ireland might be helped by a bailout. It’s mostly being driven by financial considerations.” said Tetsu Emori, a commodity fund manager at Astmax in Tokyo.

Wait and See What the Weekend Brings

Both the Chinese rate hike rumours and the Ireland bailout talks may well play out over the weekend, when the futures market is closed. Keeping an eye on these two developments may well give indications of oil price direction early next week.

ICE Brent Oil Price

Brent crude oil futures closed trading on Friday at $75.11 on the ICE Futures Exchange, down $5.59 from the week’s early trading price of $80.70, 07.15 GMT on Monday 9th August.

NYMEX WTI Light Oil Price

US Light crude oil futures closed trading on Friday at $75.39 on the NYMEX, down $5.86 from the week’s early trading price of $81.25, 07.30 GMT on Monday 9th August.

“The whole tone of the week is that without the aid of an economic recovery, the market can’t hold $80. We traded right down to our next technical level at $75, and while the market wasn’t able to trade down from there, it is poised at that precipice.” said Gene McGillian, a broker with Tradition Energy.

There is currently alot of pressure from speculators when part of the global economy appears to be taking off, pointing to an increase in demand for oil, and then it will drop back on the release of something like US unemployment figures. This is making it very difficult to predict whether a drop will last ten minutes or ten weeks.

OPEC Oil Report Predicts Higher Oil Demand

OPEC inceased its outlook for 2010 and 2011 by 140,000 barrels a day each in its monthly report which came out on Friday 13th August. OPEC predicts that worldwide crude oil use will increase by 1.05 million barrels a day, or 1.2 percent in 2011 to average 86.56 million a day, OPEC’s secretariat said.

“Global economic recovery is projected to continue through the whole of 2011 with an even distribution between the first and second half of the year. Oil demand growth will remain moderate.” OPEC said in the report.

What’s In Store For Oil Prices Next Week

The oil market is likely to trade in a tight range this week in the absence of any major trigger and seems to have support at the $75 price level. On the downside, it’s worth noting that oil prices have dipped below the $70 a barrel mark only twice in 2010, in early February and May, for one trading day.

Once again, oil prices will take direction from US and European stock markets, the US dollar and major market and economic reports.

EIA expects world oil prices will rise slowly as world oil demand increases because of projected global economic growth, slower growth in non OPEC oil supply, and continued production restraint by members of the OPEC.

Projected world oil consumption increases by 1.6 million barrels per day in 2010. Countries outside of the OECD, especially China, Saudi Arabia, and Brazil, represent most of the expected growth in world oil consumption. Among the OECD countries, only the United States is expected to show significant increases in oil consumption of about 0.15 million barrel per day in both 2010 and 2011.

Economic growth, expanding populations and higher standards of living mean that crude oil demand is set to rise in the future, despite significant improvements in energy efficiency. OPEC expect energy use to increase by more than 40 percent by 2030, however 2008 and 2009 were the first time since 1981 that global oil demand declined in two successive years.

Crude oil stocks rose by 7.5mn barrels, much higher than analysts had anticipated. All eyes will now turn to the more widely watched EIA weekly inventories.

Traders sold commodities as concerns persisted about the strength of the Eurozone economies, and warnings from Fitch about the parlous state of the US and UK credit ratings. A stronger Dollar also helped push prices south.