Crude breaches $119 in frantic trading

By FT reporters

Published: February 21 2011 08:31 | Last updated: February 24 2011 15:59

Thursday 16:00 GMT. Oil’s grip on global investors gets ever tighter, earlier crushing risk appetite with another sharp move higher.
However, a Financial Times report that Saudi Arabia would try to make up the shortfall from any disruption to Libyan supplies has knocked crude off its highs and helped equities pare losses.
The S&P 500 on Wall Street, which had looked set to open down nearly 1 per cent, is off just 0.1 per cent, helped by an improved reading for US weekly initial jobless claims.
Brent crude had breached $119 a barrel during a period of frantic trading around 0745 GMT as industrial needs were hedged and traders exploited an explosion of upside momentum.
Worries that reduced supplies from Libya may be replicated in other regional producers facing potential political turmoil has led to the world’s oil benchmark jumping almost $17 this week. Brent is trading at $114.06, up 2.5 per cent, as fear delivers extreme volatility to dealing desks.
The scramble to secure output is shown by a steepening “backwardation” futures curve, where contracts for immediate delivery command higher prices than more distant ones.
The spike in crude increases costs for companies and consumers and threatens to dislocate the global economic recovery, pessimists reason.
Stocks and commodities, which have had a good run over recent months, are thus suffering as traders take profits.
The FTSE All World equity index is off session lows but still down 0.2 per cent, its fourth consecutive session of declines that leaves the gauge lower by 2.6 per cent from Friday’s two-and-a half year peak.

Trading Post
The Energy Information Administration released its weekly update on US gas inventories today.
Few traders expected news capable of igniting the natural gas futures market, where prices remain at depressed levels even while the world frets about energy supply dislocation as Libya burns. Not even last week’s news of a larger-than-expected 233bn cu ft stock drawdown could keep the front month NatGas contract above $4 a million British thermal units.
And on Thursday, a light inventory draw for this week saw the price slide to a 3-month low around $3.80/mBtu. The problem for frustrated NatGas bulls is that the US market appears chronically well-supplied. Production is running near record highs, with the number of drilling rigs – though declining – at more than 900, still well above the 800 at which the market will tighten, according to Reuters.
Exporting the excess in liquid form is difficult because of cost, logistics and consumer resistance. Dealers are also eyeing additional flows from developing shale fields.
Not even the harsh winter in the US north-east was sufficient to drain stockpiles.
Bloomberg notes that energy industry net short positions are at the highest since November 2008, and hedge funds have cut bullish bets sharply. On such pessimism can bounces be born.

European bourses are under the cosh, with the FTSE Eurofirst 300 down 0.5 per cent. The alternative energy sector is one of the gainers as investors reason that the second oil spike in the space of three years may encourage a switch to less volatile, and less politically and environmentally costly, sources of energy.
The Istanbul stock market is down 3.8 per cent on worries regional instability may spread. The cost of insuring Turkish and Israeli sovereign debt against default rose earlier to 7- and 19-month highs, respectively.
Perceived havens such as the yen and Swiss franc are seeing inflows, as traders put a higher premium on risk aversion than any classic understanding of forex fundamentals: both Japan and Switzerland need to import all their oil, so higher prices hurts their terms of trade and would normally hurt their currencies.
Gold sits less than $20 shy of December’s record high of $1,431 an ounce, boosted by a geopolitical, and fear-of-inflation, premium.

Commodities – The US-based Nymex oil contract is up 1 per cent to $99.11 a barrel – after earlier touching $103.41 – its underperformance reflecting high levels of inventories at the hub in Cushing, Oklahoma. The CBOE’s oil volatility index has jumped 42 per cent over the past three sessions as investors scramble to buy options on the oil price.
Agricultural products and industrial metals are mostly lower as traders look to raise cash and protect profits. Gold is up 0.1 per cent at $1,412 an ounce.

Forex – Demand can be seen for the yen and Swiss franc, up 0.9 per cent versus the dollar to Y81.74 and higher by 0.8 per cent to SFr0.9252, respectively. The Swissie earlier hit a record high of SFr0.9238.
The dollar index is down 0.2 per cent to 77.22, flirting with 3-month lows, as the buck’s haven cachet deserts it.

Rates – The slide in risk assets is providing a boost for core bonds. The US 10-year yield is down 5 basis points to 3.43 per cent, a near 4-week low,
A five-year auction of $35bn of notes on Wednesday was poorly received. The yield was the highest since July, at 2.19 per cent, with a bid-to-cover ratio below the past year’s average, but only slightly. Yields rose slightly after the auction as well, up 3 basis points to 2.16 per cent. The US will auction $29bn of seven-year notes later on Thursday.

Asia-Pacific – Shares were lower for a fourth consecutive day as the escalating crisis in Libya damped risk appetite amid growing concerns that higher oil prices could derail the global economic recovery.
The FTSE Asia Pacific index fell 0.9 per cent with Japan’s Nikkei 225 average losing 1.2 per cent as a stronger yen weighed on exporters. Asian oil producers were generally firmer but otherwise the mood was downbeat.
Australia’s S&P/ASX 200 was off 0.8 per cent, as resource stocks lost ground on lower copper prices, pushing the benchmark stock index to a three-week low.
The Shanghai Composite was up 0.6 per cent, helped by energy stocks, but Hong Kong’s Hang Seng followed the broader trend, losing 1.3 per cent as airlines swooned on high fuel cost worries.

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