Sunday, November 12, 2006

Oil and gasoline prices remain in a trading range

Although I have noticed that retail gasoline prices have started to tick up again, crude oil prices remain within a fairly narrow trading range in recent weeks, continuing to reflect market uncertainty as to whether the next major move is to the upside or the downside. This trading range scenario is not inconsistent with the possibility that crude oil may rally moderately at some point in the not too distant future, even as there is also the possibility of a further withdrawal of speculative capital from the commodities markets causing a significant decline in prices.

I would also note that crude oil futures prices are in contango (rising as you go out in delivery date) through July 2008, so we could see crude tick up each month for quite some time as each front month expires and the next month becomes the front month. For example, if there were absolutely no change in prices, crude would jump from $59.59 to $61.54 on November 20, 2006 as trading of the December contract ceases on November 17 and the January 2007 contract becomes the front month for trading. That's a $1.95 jump. Similarly, there is a $1.34 jump from January to February futures ($62.88), a $0.95 jump to March futures ($63.83), a $0.72 jump to April ($64.55), a $0.59 jump to May ($65.14), a $0.48 jump to June ($65.62), a $0.41 jump to July ($66.03), a $0.34 jump to August ($66.37), a $0.29 jump to September ($66.66), a $0.25 jump to October ($66.91), and smaller increases through July 2008 ($67.87), no change to August 2008, and then backwardation (declining prices) from then on all the way out to December 2012 ($62.57).

In short, I am prepared to see a moderate rise in oil prices in the coming months, but I would not bet against declining oil prices either, especially if economic growth continues to be modest and the commodities markets continue to hemmorage capital as frantic speculators grow increasingly weary of anemic returns.

I would also note that since gasoline prices remain at a fairly high level, the vast majority of car and truck buyers will be very keen to raise their personal energy efficiency. This will be a slow evolution, but the per-capita consumption of energy (at least in the developed countries) is likely to trend down for the forseeable future.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $55 to $65 for the next few months.

-- Jack Krupansky

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