Oil price rallies to more than $80, but will it stay that way?

Oil and natural gas prices started the year with a rally today, mainly because of the weather and perhaps a bit of bullish sentiment lent by the falling dollar, the unresolved oil pricing dispute between Belarus and Russia and the positive manufacturing news from China. But will these levels stick around much of this year, as traders and some notable onlookers expect?

February crude oil futures trading on New York’s Mercantile Exchange today were up more than $2, or 2.6 per cent, at more than $80 a barrel, while gasoline futures were up 2.59 per cent. In London, Brent futures rose $1.85 to $79.78 a barrel after hitting a high of $80.13.

The unresolved oil pricing issue between Belarus and Russia was also sighted as a reason for the increase even though Belarus’s state oil firm said that Russian oil was flowing normally to Europe regardless of Minsk and Moscow’s differences.

Heating oil futures in New York were up more than 3 per cent as forecasters expected low temperatures to persist much of the week.

With natural gas warming many more US homes than heating oil (which is used mainly in the Northeast) the frigid weather was also felt by the Henry Hub futures contract, which rallied 25.4 cents, or 4.6 per cent, to $5.826 per million British thermal units. There was an even more impressive spike in gas price in the UK, which has a far less of a liquid market than the US, with intraday wholesale prices as much as doubling and then quickly reversing their gains.

But mixing my metaphors in the hope of attracting Lucy Kellaway’s attention as one noted oil analyst did today, there are gremlins on the horizon.

Firstly, no-one can accurately predict the world’s economic recovery (this is why Javier Blas and I happily watch Ed Crooks do the FT’s yearly forecast for energy prices) and secondly, there are tanker-loads of oil supply, potential and real, ready for the taking.

This supply – both actual and potential given Saudi Arabia’s 4m barrels of spare capacity – and a more pessimistic view of the economy’s recovery, underpin the views of traders such as Vitol, Glencore, Trafigura, Gunvor and Mercuria (theoretically the best informed of all given that they ship around much of the world’s crude). They predicted in interviews with the above-mentioned Mr Blas that prices won’t rally much further than where they are today, at least for the next few months, a strikingly similar view to that espoused by our own tankerless, but well informed, Mr Crooks who was forecasting the entire year.

On the supply side, there is always Opec to contend with and so far oil volumes resemble a feast more than a famine. Nigeria’s oil output, long plagued by attacks on its industry installations, is back above 2 million barrels a day, more than Nigeria has managed since March 2008. And Iraq has already had to assure jittery Iran that it does not intend to flood the market now that it has signed lots of agreements with international oil companies all promising to boost production at its dilapidated fields. In total Iraq could be pumping as much as Saudi Arabia in a few years, at least theoretically,

But Iraq’s optimistic supply outlook may be short-lived. Candidates are already voicing opinions about reversing the deals if they are voted into power in March.

More than any other single predictable event, that election, will be the one to watch.

So if you want an early indication whether the predictions of the traders and Ed Crooks, will be proved right, and prices you see today will stick around for much of the year, tune into Baghdad over the next two months – it’s more interesting than trying to predict the economy.

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