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Crude Prices Fall Back After Monday’s Dollar Induced Rally

Monday’s early strength in Crude markets continued throughout most of yesterday as the oil price continued to find support from a weak US Dollar and stronger equities. In North America oil gained further momentum to hit an intraday high of $79 per barrel. Today in Asia and Europe crude oil futures have eased off to trade around $78.60.

Over recent sessions some analysts have suggested that the weak dollar may be masking the fundamental supply and demand issues in the underlying energy market and which are claimed to imply that prices should be lower.

Similarly in several reports earlier this week, prominent energy consultant and market commentator Daniel Yergin said that the current oil price does not reflect the supply-demand dynamics in the physical oil market. Daniel Yergin is the Chairman of Cambridge Energy Research Associates, he won a Pulitzer Prize in 1992 for his book: ‘The Prize: The Epic Quest for Oil, Money and Power’.

Many analysts and market commentators have identified the weak dollar as the primary factor in the recent strength in crude oil markets. Despite challenging fundamental conditions which have shown relatively high inventories and weak demand in the US, the oil price remains stuck just below the key $80 mark.

Typically a weaker US Dollar provides support to the oil market for two principle reasons. The first is due to the fact that primary commodity market is priced in US Dollars. A weaker dollar directly increases the relative value of the commodity for investors outside the USA, in simplified terms, the cheaper the dollar is, the more of the commodity an investor can buy with the same amount of the stronger domestic currency.

Secondly, investors and traders often purchase commodities such as crude oil and gold as a protection against inflationary forces. When the US Dollar falls investors buy the commodity to retain value.

Whilst many will debate the relative factors and influences on the current oil market, others argue that the general consensus points to the sustainability of current prices.

Yesterday, the executive director of the global energy advisory body, the International Energy Agency (IEA), suggested that crude demand will grow next year, led by emerging economies such as China and India. According to Nobuo Tanaka, emerging economies will provide almost half of 2010’s global demand. Meanwhile Mr Tanaka said that the developed economies, OECD (Organisation for Economic Co-operation and Development) demand would be almost flat.

The relatively positive tones reflect the views of Gazprom Deputy Chairman Alexander Medvedev, who in a report from the Associated Press (AFP) over the weekend declared an end to the ‘Epoch of cheap oil’. While speaking in Asia Medvedev commented on the crude price in 2010, stating that crude prices will be anywhere in the region of $75 to $85 next year.

On the London Stock Exchange oil and gas stocks have been largely unmoved over the course of the morning’s trading. Few majors showed any signs of activity with FTSE 100 constituents Cairn Energy (LSE: CNE) and Tullow Oil (LSE: TLW) both rising marginally to make gains of around half a percent.

Petrofac (LSE: PFC) moved in the opposite direction, falling half a percent while BG Group (LSE: BG), Royal Dutch Shell (LSE: RDSB) and British Petroleum (LSE: BP) were unchanged.

In the FTSE 250 African focused developer and producer Afren (LSE: AFR) was the only stock to make any notable move higher, as it climbed 2%. Elsewhere Premier Oil (LSE: PMO) and Dragon Oil (LSE: DGO) underperformed the sector on Tuesday, as the mid-cap oil and gas stocks fell 2% and 1% respectively. The rest of the sector was practically unchanged.

Among the juniors, Aurelian Oil & Gas (AIM: AUL) was the strongest performer, as it rallied 20% earlier this morning after the Eastern Europe focused junior announced its largest discovery to date at the Brodina block in Romania. USA focused explorer Leed Petroleum (AIM: LDP) were also fairly strong rosining almost 9%.

Somali focused explorer Range Resources (AIM: RRL) and oil and gas exploration financiers Empyrean Energy (AIM: EME) also advanced gaining 5% and 3% respectively this morning. Sterling Energy (AIM: SEY) rose 2%.

Irish oil and gas explorer Petroceltic International (AIM: PCI) has reported successful results from Isarene oil and gas project where the INE-2 well demonstrated a commercial flow rate, despite the positive result, its shares slipped 2% on profit taking.

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