Energy Finance

The price of oil may have reached a near-term peak, according to Calyon Securities (USA) analyst Jeb Armstrong. Oil may have peaked in the short term and could consolidate to $100 per barrel, a level considered to be somewhat bearish after a recent high of $135 plus. Also, there are signs that a further correction may be in the offing for second-half 2008, as high prices continue to erode demand.

“The stop-loss for our view is a weekly close above $143, yet a close back below $120 reinforces our scenario and sets up a multi-month period of consolidation, which should see crude oil fall back into double digits near the January 2008 low of $86, which is our first major target. The long-term wave count, however, remains bullish and still allows for moves to test $200 and beyond going into 2009,” says Armstrong.

Recently revised International Energy Agency data indicate that demand declined 3% year-on-year during first-quarter 2008 versus a previous estimate of 2%. Meanwhile, Indonesia has announced large price increases and Malaysia and Taiwan plan to reduce subsidies. Record high prices in Japan and Korea should also slow the roll of high oil prices during second quarter.

Another surge suppresser will be the forecasted narrowing of diesel-crack spreads. While recent spreads have been strongly correlated to oil prices, suggesting that the recent oil rally has been partially driven by an unexpected surge in diesel demand, spreads should narrow by second-half 2008.

“We believe this (current diesel crack spreads) has short legs, as part of the increased demand is temporary and large refining capacity will come on stream in the second quarter 2008 and in 2009. Softened diesel cracks should be bearish for oil prices,” he says.

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