Crude Realities: Looking Down The Barrel

After much hesitation, drama and debate, the price of oil -- like an unwilling bride -- finally crossed the triple-digit threshold earlier this month. But what should have been a milestone in market history turned out to be something of an anti-climax. Oil prices didn't ease effortlessly past the $100 marker. A lone trader, seemingly determined to secure his place in the market’s history book, made the trade that took oil prices to that historic level.

Oil Barrels
Oil Barrels

The trader, named by U.S. and British media as Richard Arens, didn’t so much as 'hit the button' on the much talked-about trade, rather than scribble it down. Arens is a floor-trader -- seen by many as a dying breed. The bulk of activity is electronically transacted, flashing across terminals in trading rooms across the world.

The floor-traders, who yell their buy and sell orders across the pit, look set to go the way of the Dodo bird. Arens wisely saw the writing on the wall and the $100 trade was his swan song. "The magic figure was hit apparently on the back of a single trade, rumored to be a local intent on fame," Sucden analysts wrote in a commentary on the record-breaking deal.

Here's what the New York Times' Daily Intelligencer had to say: "Trader Richard Arens, who runs a brokerage named ABS, made a vanity trade in order to push oil past the $100/barrel milestone. We're sure the girls at the bar will be real impressed." The word on the trading floors now is that the ticket that he wrote the trade on is up for auction.

The odd irony about the trade was Arens lost $600 on the deal. He offered $100,000 on the New York market for 1,000 barrels of oil, producing the much talked of $100 a barrel. Those triple-digits sparked anguish across the financial markets. He later sold on the contract for slightly below 100 dollars, taking the $600 loss.

Breaching $100

It’s worth stressing that oil only touched $100 because of Arens’ trade. It never crossed that key level and we had to wait a few days before it breached a century and even then it ventured only nine cents above the line - not entirely a convincing move past triple-digits.

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So much for Richard Arens’ 15 minutes of fame … when the euphoria settled down, the market refocused and shifted its attention to the question -- would oil make a second, more convincing move past $100? More importantly, will the fundamentals prove strong enough to sustain a move above $100 a barrel?

The signs don't look supportive. As I write this column on Friday, January 18, oil futures have fallen for the fourth straight day to below $90 a barrel. That’s on heightened fears the U.S., the world’s biggest energy consumer, is teetering into recession. Prices have fallen nearly 10 percent since reaching a record $100.09 a barrel on January 3.

Still, there’s a body of evidence to support the view that oil could shrug off the weakness besetting the broader commodities now though much hinges on the health of the U.S. economy. As long as demand in emerging markets such as China and India remains robust, analysts say commodities like oil will continue to perform well. Then there's also the geopolitical premium.

The threat of supply disruptions from Iran, Nigeria and Venezuela continue to haunt the oil market. Plus, the weakness in the U.S. dollar, which makes dollar-denominated barrels cheaper for importers paying in non-dollar currencies, has also boosted prices.


Forget terror & war -- demand trumps geopolitics:


And as energy economist A.F. Alhajji pointed out to me recently, extremes in weather could also send oil prices higher. "There is a case to be made for a sustained $100 next summer on violent storms in the Gulf of Mexico and a heat wave in the Gulf region that causes power shortages in countries such as the UAE and Kuwait," he said.

JPMorgan's oil team recently raised their forecast for U.S. oil futures to $76.50 a barrel from $68.24 previously. The revision reflects expectations of increased, "investor allocations to commodities broadly and oil." JPMorgan raises an interesting point -- the role of hedge funds and other big speculators in the oil market this year.

The appeal of commodity markets may grow this year as investors shift their money away from equities. "Ironically, while slower than expected economic growth could trim global oil demand, weak equities performance, and ongoing weakness in the dollar could spur commodity inflows," JPMorgan says. "Anecdotally, new institutional investors that had not previously allocated funds to commodities are planning to do so in 2008."

Looking ahead, the Organization of Oil Exporting Countries is due to meet in Vienna on February 1. Should we see the price of oil make a fresh assault on $100 a barrel, the invariable call from consumers on OPEC to open the taps will surely follow. For their part, OPEC will no doubt issue the usual reassuring messages, repeating that $100 is beyond their control. But heading into that meeting, it seems the producer group won’t be under undue pressure … especially if the price of oil continues to soften as has been the recent trend.

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