By DAN STRUMPF CONNECT
Crude prices are up 14 percent this year on the New York Mercantile Exchange, despite slowing growth in China and surging production in the U.S. Dan Strumpf has more. Photo: Getty Images.
Economic gains in the U.S. and upgrades to the nation’s energy-transport infrastructure are helping oil shrug off the downturn in other industrial commodities.
Crude prices are up 14% this year on the New York Mercantile Exchange, despite slowing growth in China and surging production in the U.S. They also buck a broader slump in commodities, with the Dow Jones-UBS Commodity Index down 9% this year.
Dan Strumpf/The Wall Street Journal
Transportation upgrades have reduced a glut that had depressed the price of Nymex crude oil, which is stored in Cushing, Okla.
Some investors see potential for more gains. Money managers have the biggest bets on record that oil prices will rise, according to the Commodity Futures Trading Commission, which provides data back to 2006. Net bets that prices would rise have more than doubled this year to 334,094 contracts, from 149,893 contracts at the start of the year, according to the Commodity Futures Trading Commission. Those positions are even larger than those in the months before prices hit a record of $147 a barrel in July 2008.
Exxon and Chevron Miss Out on U.S. Oil Boom
On Wednesday, crude oil for September delivery, the front-month contract, rose $1.95, or 1.9%, to settle at $105.03 a barrel on the Nymex. Brent crude gained 79 cents, or 0.7%, to $107.70, on ICE Futures Europe.
Some oil bulls said fears of a disruption to Middle Eastern supplies are keeping prices at a premium. Others are banking on a rise in U.S. oil demand. The U.S. burns more oil than the next three countries combined. That means the small increase in U.S. gasoline demand this summer is making up for a slowdown in China that has sent other commodities plunging.
“The big driver for oil has been the strength in the U.S.,” said Lee Kayser, who helps oversee $1.9 billion in commodity investments as a portfolio manager at Russell Investments in Seattle. Mr. Kayser invests across commodities but has tilted more heavily toward oil this year. “China is deteriorating, Europe is still problematic, but if the U.S. continues to chug along…things are relatively positive for oil.”
When it comes to oil demand, the U.S. is the biggest engine driving prices. U.S. gasoline use alone, nearly nine million barrels a day, comes close to total demand for crude in China, the second-biggest consumer. The Energy Information Administration projects China’s demand will average 10.58 million barrels a day this year.
And U.S. demand is starting to increase after stalling for years while the U.S. economy grinded through its slowest recovery since World War II. The government said Wednesday that U.S. gross domestic product expanded 1.7% in the second quarter, though growth for the first three months of the year was revised downward. American motorists are using 3.7% more gasoline than they were this time last year, according to the EIA.
The additional demand is coming just as China’s thirst for oil is tapering off. Economists predict China’s economy will expand at its slowest rate since 1990. Oil imports fell 1.4% in the first half from a year earlier, the country’s General Administration of Customs said recently.
China’s darkening outlook has caused investors to sell many other commodities. But while the country’s expansion was a force behind record oil prices in 2008, it makes up only 11% of global demand. By comparison, China uses 40% of the world’s copper. The metal has declined 14% this year.
“A lot of other markets are more susceptible to China’s slowdown…in our minds, oil is the least exposed,” said Greg Sharenow, portfolio manager at Pacific Investment Management Co.’s $27 billion Commodity Real Return Strategy Fund.
Mr. Sharenow said his firm has been betting that U.S. oil prices would rise in relation to Brent, a global benchmark produced in the North Sea.
U.S. prices got a boost this year as new pipelines and railroad routes connected refiners with brimming Midwestern inventories, reducing a glut that had depressed the price of oil traded on the Nymex, which is delivered in Oklahoma.
But some investors said the price gains may have run their course.
Now that Nymex prices have caught up to Brent—at one point this year, the price of Nymex oil was $23 below that of Brent—it may have trouble rising further, some investors said. Brent is down 3.1% this year.
“I think the gains have more to do with the direction of pipes,” said George Zivic, who oversees $450 million as commodity portfolio manager at OppenheimerFunds Inc. “I would be surprised if we can, at 2% growth, maintain anything north of $95-a-barrel oil.”
Still, even if U.S. demand slows, the Middle East remains the world’s biggest supplier of oil, and turmoil in Egypt and Syria is keeping a floor under prices. Moreover, the Organization of the Petroleum Exporting Countries has indicated it could cut output for the first time in five years when the group meets in December.
Write to Dan Strumpf at email@example.com
A version of this article appeared August 1, 2013, on page C1 in the U.S. edition of The Wall Street Journal, with the headline: Crude in U.S. Bucks Commodities Slump.