Oil prices dipped on Friday while base metals were mixed as commodity markets paused following a strong rally in the previous session prompted by news that the US economy had escaped recession in the third quarter.
After rising by more than $2 on Thursday, Nymex December West Texas Intermediate retreated 43 cents to $79.44 a barrel, while ICE December Brent lost 52 cents at $77.52 a barrel.
Crude oil’s extremely high correlation with movements in the US dollar and stock market is continuing to trouble analysts who argue that oil market trading is not currently based on supply and demand fundamentals.
Olivier Jakob, head of Swiss-based oil consultancy Petromatrix, said that if the high correlation between oil prices, the dollar and the stock market were to persist, a rise in the Dow to 11,000 points would translate into WTI increasing to $100 a barrel which would hurt consumer confidence and cap recovery in the economy.
“It seems quite clear that the WTI futures market is currently part of an dollar-led asset bubble and, irrespective of oil fundamentals, the next input that will be decisive in the direction of oil prices will be the Fed meeting next week,” said Mr Jakob.
Petromatrix cautioned that an “across asset bubble” was in formation and the Fed would have to decide whether to start deflating it or allow the risk of having a burst that might be difficult to handle later on.
Michael Lewis, commodity strategist at Deutsche Bank, repeated his warning that “a mini-bubble in commodity prices could form” before the end of the year if weakness in the dollar resumed.
The New York Mercantile Exchange has moved swiftly in response to Saudi Arabia’s decision to abandon WTI-based pricing for crude sales to the US in favour of a new pricing benchmark, the Argus Sour Crude Index (ASCI).
CME Group, the operator of Nymex, plans to launch a cash-settled futures contract tracking the Argus sour crude index by year end and another contract for physical delivery sour crude in the near future.
“The Argus index is calculated as a differential to the Nymex light sweet crude settlement price,” said Robert Levin, CME’s managing director of energy research and product development.
“We think this actually ties (the Saudis) to the WTI market more effectively and more closely, but in a way they want to be,” said Mr Levin.