Saturday, November 25, 2006

Oil and gasoline prices remain in a trading range as of 11/25/2006

Crude oil prices continue to remain within a fairly narrow trading range, hovering below $60, 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.

Crude oil futures prices are in contango (rising as you go out in delivery date) through December 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 $59.90 to $61.35 on December 20, 2006 as trading of the January contract ceases on December 19 and the February 2007 contract becomes the front month for trading. That's a $1.45 jump. Similarly, there is a $1.02 jump from February to March futures ($62.37). And so on up to a peak of $68.66 in December 2008. Then, futures go into backwardation (declining prices) all the way out to December 2012 ($65.91). All of this is subject to dramatic change, even on a daily basis.

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.

I would also note that the mentality of short-term commodities traders is compatible with the people who are loudly proclaiming that the economy is falling off a cliff due to the so-called "housing recession" and that a full-blown recession is coming in 2007. I don't concur with that outlook, but nonetheless many people do and that could lead to additional downwards pressure on commodities futures.

Overall, I expect crude oil prices to remain in a relatively narrow trading range of $55 to $65 for the next few months, unless we see a wholesale exit of the commodities speculators.

-- Jack Krupansky


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