The Hindu Business Line : Fundamentals loaded in favour of higher crude prices

Oil prices are moving northward and have set new all-time highs at the front of the futures curve. Wednesday last, every single 2007 delivery month for WTI settled above $ 77 a barrel and the highest point of the curve (March 2007) settling at a new record high of $ 78/barrel, and the following two days, the market consolidated at or near those high levels.

It was in late-April that prices tested the current area. Analysts believe, unlike last time's misplaced expectations of supply increases and demand destruction, this time round, the market fundamentals are loaded in favour of higher prices as demand-supply balances tighten. There are uncertainties galore.

At the global level the second quarter has proved to be extremely tight. Rather than the normal stock-build, there was actually a stock drawdown in the second quarter. While demand has been unabated (expectations of high prices induced demand compression failed materialize), supply increases have been far from robust. OPEC production has been running down year-on-year, while non-OPEC supplies are flat. Gasoline consumption has continued to expand, notwithstanding higher rates. There is now strong belief that global demand growth in 2006 will exceed that in 2005 with China representing the key swing factor.

China is also seeking to build its strategic reserves even as its oil tanks built for the purpose have been lying empty for nearly a year now. On the other hand, geo-political concerns continue to weigh heavily on the market mood. The pace of Iranian issue - concerns over nuclear programme - has accelerated. Amid the threat of growing tension the issue seems unlikely to be resolved anytime soon. Scare of major hurricane in the US this summer is another uncertainty.