Crude Oil: Are we headed to inflated 2008 levels?

Market Pulse: Mar. 1, 2011

Fundamentals

Crude oil prices surged to a 28-month high of $103.41 per barrel and have now posted a near exact 61.8% retracement ($103.39) of the down move from the July 2008 all-time high of $147.27 to the seven-year low of $32.40 in December 2008. Bullish factors include: 1) escalating violence in Libya, Africa’s third-biggest oil producer, where its normal production of 1.6 million bpd has been cut by at least half; 2) rising concern that the civil unrest in North Africa and the Middle East will spread to other oil-producing countries in the region; 3) the slump in the dollar index to a three-week low and 4) the unexpected decline in weekly gasoline inventories which was the first decline this year (-2.80 million bbl vs. expectations of +850,000 bbl). Bearish factors include: 1) comments from Saudi Arabia’s oil minister stating that OPEC is ready to step in to meet any shortage in oil supply resulting from a disruption in crude shipments from Libya and 2) China’s action to raise banks’ reserve ratios for the second time this year, which may slow its economy and fuel demand.

Fundamental OutlookMedium-term Bullish — Crude oil prices rallied sharply to a 28-month high as the Libyan revolution cut its oil output. Promises by Saudi Arabia to boost output to make up for lost Libyan oil tempered price gains, although an escalation of the civil unrest to other major oil-producing countries in the region could easily send crude prices to new highs. The main risks for oil prices are long liquidation pressure, the possibility of a quick overthrow of Gaddafi and a resumption of normal Libyan oil output, and concern about the Chinese economy with the steady tightening in monetary policy.

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