European crude oil touched an 18-month high yesterday, reflecting growing investor confidence that demand will rise as the world economy recovers. Brent crude, the European benchmark, reached US$87.65 yesterday, its highest price since early October 2008, before falling back later as the US dollar strengthened against the euro. The increase followed the release of robust US manufacturing and home sales data, which investors interpreted as signs of a sustained economic rebound in the world's top energy consumer.
It also reflected the return to normal of European air traffic after the Eurocontrol air traffic agency lifted almost all flight restrictions related to an ash cloud from a volcanic eruption in Iceland. Expectations that jet-fuel demand would rebound as the ash cloud dispersed buoyed market sentiment. "For the time being there's a little more optimism in the market, thanks to the good economic numbers that came out of the US and the fact that Europe has reopened its airspace," Keiichi Sano, the general manager of research for SCM Securities in Tokyo, told Reuters.
The US benchmark West Texas Intermediate (WTI) crude also rose to $85.28 a barrel, after the US government released data on Friday showing that sales of newly built single-family homes last month reached their highest level in eight months. Homebuyers had rushed to take advantage of a tax credit, the report indicated. Other government data showed orders for durable US manufactured goods posting their strongest gain in more than two years.
Although of better quality, WTI crude traded at a lower price than Brent due to congested storage at the Cushing centre in Oklahoma, which is the pricing point for crude oil futures contracts on the New York Mercantile Exchange. Cushing inventories are near the record 35.7 million barrels reached on January 1 because an influx of Canadian crude into the modestly sized storage facility is not being matched by withdrawals by local US refineries, some of which are closed for maintenance.
"The problem is you cannot get a lot of crude out of the region. It's landlocked," Lawrence Eagles, the head of commodities research at JPMorgan Chase in New York, told Bloomberg. "It points to being a very local issue." About 16 million barrels of unused storage capacity remains around Cushing, Barclays Capital has estimated. Some Canadian producers shipping crude to Cushing would need to halt operations if the remaining space filled up, the US energy department said.