Oil Hits $140: What Could Trigger a Reverse?

Why in the world would oil prices rise if Saudi Arabia boosts oil production? Logically, one would assume that more supply would equal lower prices, but in the case of oil, Saudi Arabia’s announcement was just not enough. So far, Saudi Arabia has announced plans to increase production by 200,000 barrels a day in July, which is less than their production increase last month. If oil prices managed to hit a new high after the last increase, it is not surprising to see prices fail to react to the smaller boost in production. Although Saudi Arabia could increase production even further following the OPEC meeting in Jeddah this weekend, for the time being, the market doesn’t care.

What is Driving the Latest Oil Spike?

Unfortunately there isn’t one concrete reason to explain the latest rise in oil. Instead, it is a variety of reasons that have added to the upside pressure in the commodity. This includes:

1) US Dollar Weakness Stemming from Manufacturing Data and Disappointment at G8

2) Sanctions on Iran

3) North Sea Platform Fire

4) Option Expiration

What Could Trigger a Reversal in Oil?

There are 4 things that can reverse the trend in oil prices and ideally 2 out of the following 4 should happen at the same time to trigger a meaningful turn in oil prices:

1) Other OPEC nations follow with production increases

2) US Dollar needs to rise and rise quickly

3) Congress needs to clamp down on oil speculators

4) US releases strategic oil reserves.

Even though other OPEC nations may follow in Saudi Arabia’s footsteps to announce an increase in production, their spare capacity is limited. The only hope is for the US dollar to rise and rise quickly which is why the Bush Administration is no longer just paying lip service to the strong dollar policy. Instead they taking serious interest in making sure that the currency stops falling because they know that it is one of the few ways to stop oil prices from rising. As for congress clamping down on oil speculators or the US releasing strategic oil reserves, those are a long shot, but if they do happen will result in a sharp and lasting reversal in oil. Otherwise there aren’t many other ways to prevent oil from rising to $200 a barrel.

Comments

[Aaron Ramsay:]

I think you should probably get clarification on any questions you have before you toss around insults. I think from what she says, you can deduce that the cumulative boost is not perceived as being enough of one.

2008 Jun 16 03:31 PM

[cdcaddy:]

I think what she needs is a little more research. While OPEC may produce a bit more, the non OPEC oil suppliers are having fall offs in their production. Look at the total oil supplies not just the Saudi's. The only quick fix is to curtail consumption around the globe. Plus this country needs to start a mass infrastructure campaign for E85 from sugar cane like Brazil does. Just wait and watch - corn ethanol producers in the US will have their heads [and bottom lines] under water with corn prices climbing higher and higher...

2008 Jun 16 04:42 PM

[nycDem:]

...or perhaps "logicalthought" should not be tossing around insults at all. What we need is intelligent debate. Not rancor.

Also, Brian Pursley, please stop slamming the Dems every chance you get. There are many debates to be had about opening up ANWR, drilling off of the Florida coast (opposed by Jeb Bush - a Republican, I might add), conservation, alternative fuels, etc. But reflexively blaming one political party for the lack of a comprehensive energy policy here in the U.S. is unhelpful.

Ideology only blinds people.

2008 Jun 16 07:00 PM

[DRich:]

Paul Sterman,
The brokerage houses said $150 by July 4 and $200 by year end. Most everyone says these are forecasts. But unless you really believe that BRICs are ever increasing demand with the IMF stats showing world economic slowing & subsidies being withdrawn, those numbers are merely the statement of fact. Unless limits are placed on non-industrial use futures contract holdings are implemented, you've been told what the future is.

2008 Jun 16 10:21 PM

[King of Sanity:]

If oil hits $200.00 per barrel, that will be all she wrote. 1929 will look like a small correction in the economy with what will come to pass. If this keeps up, those speculators that are driving up the cost of oil will find themselves with a pile of useless dollars and in the same terrible place as the rest of us.

2008 Jun 16 11:19 PM

[Brian Pursley:]

Atlantic: sorry if ideology blinds people. I swear to you it's not my fault. Earth is what it is.

"It is a singular and notable fact that, while most other branches of science have emancipated themselves from the trammels of metaphysical reasoning, the science of geology still remains imprisoned in 'a priori' theories." -- Sir Henry H. Howorth, 1895

"Geology is the prisoner of several dogmas that have had widespread influence on the development of scientific thought." -- William R. Corliss, 1975

2008 Jun 16 11:58 PM

[Saul Sterman:]

DRich,

Thanks for the reply.
I am aware of the calls by several brokerage houses as you mentioned. My point was, why should it stop at $200? The brokerages gave a time related price increment based on current pricing models whereas Lien is talking in conceptual terms not relative to a time factor.
In theory, based on Lien's hypothesis, the price of oil should be rising continuously without limit.
In summary, either Lien should state a time frame for her $200 assessment and either base it and/or peg to other analysis, or say 'to prevent oil from rising continuously'.

Saul

2008 Jun 17 03:35 AM

[naturalsol:]

well, oil shale is set to be developed. its estimated, pardon my lack of links, to be about 5 times more expensive to produce a barrel of oil from it.

mining the oil shale is environmentally disruptive, much like drilling our coastlines. We have no quick fix that will work, and prolonging our fossil fuel depence (as if there was another option) will require utilizing gasification of natural gas, oil shale mining and cracking, increased coal mining and liquifying, and probable establishing new rigs on the coast.

However all of that merely buys us time. Perhaps 100 years or so...who knows? We need a long term alternative.

When B*sh talks his gibberish and mentions a "simple chemical reaction" that gives hydrogen gas from water...he doesn't mention, or perhaps know, that the reaction 2H2O ---> 2H2 + O2 requires energy input...even if the recently discovered almost perfectly efficient MnFe3O4 catalyst still requires energy input to give hydrogen. Even if some quantum system is devised utilizing tunneling to lower the required energy...some energy is required...
Nothing is coming down the pipe until...well, thermonuclear fusion is safely/effectively harnessed.

And we are running low on cheap, easy to access/produce, energy (OIL). That's whats with the prices.

Cmon...i'm so sick of hearing blame on speculators, and financial instruments.... what happened to supply and demand? Yes, supply can be doctored by big oil, and yes demand can dampened...however oil is non-renewable after all.

the real production limits had to be reached sometime.

2008 Jun 17 04:33 AM

[maximax:]

what a shallow analysis. Kathy is mainly a FX trader right? Some knowledge of oil would help here.
" 1) Other OPEC nations follow with production increases" - which one? can't think of any that could, at least not by much.

"3) Congress needs to clamp down on oil speculators" - you as a trader might actually understand this one. How are traders able to push up the oil price this much over a sustained period? How has that much money? How come refineries are currently paying even more than the WTI benchmark for light sweet crudes? But I am not a trader, so maybe you can enlight me?!

"4) US releases strategic oil reserves." - Are you suggesting that the SPR should do a Helicopter Ben and flush the market with oil to bring down prices for a short while? Please tell me that I misunderstood you, because this would be completely nuts.

"Otherwise there aren’t many other ways to prevent oil from rising to $200 a barrel." - yes there are. Increasing refinery complexities so that heavy sour crude can be refined at a profit by more refiners, cutting down consumption by increasing efficiencies, new technologies etc. Lowering fuel standards would also reduce crude demand. But why am I providing free knowledge to someone who is making money from newsletters etc while having no clue of what she is talking about. At least when it comes to oil.

2008 Jun 17 08:09 AM

[Mmarrkk:]

Simple d, you say the mining oil shale is "environmentally disruptive, much like drilling our coastlines". Could you please tell us how drilling our coastlines is environmentally disruptive? We have the technology and the oversight to allow for drilling along any coastline and not have it disrupt anything. In fact, it has been shown to be highly beneficial to fish populations. The only disruptive thing is the neural connectors of some members of our Congress who can't quite figure out out to punch their way out of a wet "energy paper bag". And both presidential candidates leave a lot to be desired here as well. But alas, they are both parts of the Congress which has gotten us to this dismal place to begin with. At least McCain will consider drilling; Bamma Mamma won't even consider it, unless it yields him a sweet deal on some real estate at below market prices. Oh, I forgot, we aren't supposed to mention the sins of the annointed one. Oh great Changer and Hoper! Forgive me! My only Hope is that he will leave some spare Change in my pocket when he's done confiscating all of my earnings.

2008 Jun 17 08:46 AM

[erniem:]

shale and oil sands are enormously destructive in oil production. The waste and destruction is shocking.

Coastal drilling should start yesterday.

Another buck in gas prices should produce a drop of at least a million barrels a day in gas consumption, which should have an effect of prices.

2008 Jun 17 09:07 AM

[pockyclips ...:]

Unfortunately, the most energy intensive industry is the production of energy. Most of our current inventory was developed in the 80s @ $20/barrel. Even if ANWR and deep water drilling are wildly successful, production costs are probably >$65/barrel.

Since oil companies are not in business to sell oil @ cost, expectations of the price of oil decreasing drastically are pipe dreams. Hopefully our political and economic leaders will realize that this present model is not sustainable. Not to mention making our potential enemies even more powerful.

2008 Jun 17 09:10 AM

[maximax:]

wouldnt compare coastal drilling to shale extraction either, but drilling is not beneficial for the environment. and it will not solve america's oil problem, it will only buy time. if it starts soon, then it will largely matter from 2020 onwards, so it should not matter in this presidential campaign. this politicising on this site is getting on my nerves.

2008 Jun 17 11:53 AM

[jjason:]

Those of you who are honest about the speculation in commodities futures that is going on should read the following;

www.star-telegram.com/...

and

www.commerce.senate.go...

I wonder if Brian Pursley and Saul Sterman make a living selling "advice" to people to invest in commodities and gold and silver.

Finally, tell your Congressman to stop the speculation that is going to ruin our economy.

2008 Jun 17 11:59 AM

[naturalsol:]

If McCain's info is right, not trying to politicize, there are 21 billion barrels of oil on the US coastlines. At current rates of US consumption, estimate 21 million barrels per day, this gives us a whopping 1,000 days. The coastlines are a drop in the bucket.

Shale and liquid oil are different...absolutely... However, the relevant end products are very similar and both would feed into the existing fossil fuel infrastructure.

Pockyclips ~ that's a problem. Real food for thought there.

mmmarkk ... lol,nice name. ah, the problems i was thinking of were habitat destruction and potential spill issues. Yes, its exponentially less destructive than strip mining.

man i've got a lot of time on my hands.

2008 Jun 17 12:22 PM

[John Lounsbury:]

In reading through all the posts, I come to one conclusion: more drilling will not solve the energy problem. It takes 5-10 years or more to start production from new drilling (AMWR, coastline) and then there is energy for only a few more years before the estimated oil is burned up. Major production from shale and tar sands requires massive amounts of energy. If we can produce this massive amount of energy then using it directly rather than going through another intermediate process before use makes a lot of sense. The same can be said for any other energy intensive production process for combustible fuels (example, coal gasification or liquidification).

In 5-10 years we can move significantly toward using solar, wind, geothermal and tidal energy. We have to go there eventually. I say, the sooner the better.

Ultimately, these "natural" energy sources should be much cheaper per kilowatt than burning combustible fuels. Then hydrogen becomes economically attractive for mobile electricity generation in transportation.

Both of the current presidential candidates seem to be aware of these factors. Maybe we will finally get an energy policy that makes economic and environmental sense.

2008 Jun 17 02:57 PM

[billp37:]

"Major production from shale and tar sands requires massive amounts of energy. If we can produce this massive amount of energy then using it directly rather than going through another intermediate process before use makes a lot of sense. The same can be said for any other energy intensive production process for combustible fuels (example, coal gasification or liquidification)."


Yes, Energy Returned on Energy Invested [EROEI], not EROI, should be of paramount importance.

Enjoy a field trip to the San Juan coal-fired electric generation plant on June 16, 2008.

www.prosefights.org/pn...

2008 Jun 17 03:36 PM

[Brian Pursley:]

SIMPLE d: What makes you think "McCain's info" is right? 21 billion barrels? Did they just make that up or what? More likely there is 210 billion barrels. I just totally made that number up but it seems that's what everyone else is doing.

2008 Jun 17 06:58 PM

[Saul Sterman:]

jjason,

I fail to comprehend your comment.
You are entitled to your opinion as I am entitled to mine.
If it annoys you that I think that a correction is forthcoming ONLY when certain conditions are met, then so be it.
If it annoys you that I disagree with Lien's assertion that the correction will last forever and oil will never go up again ("will result in a sharp and lasting reversal") then so be it.

Since I seem to have gotten your attention, here's how I see it playing out...

1) Eventually there will be a major correction once there is evidence that there is a surplus supply of oil OUT OF THE GROUND that has no takers. This in turn will force the hand of the speculators.

2) I first noticed in May that a large number of mutual funds and institutions were selling XOM aggressively. I then realized that there are actually two opposing forces at play. First, the expectation that oil and NG prices would drop. Second, though seemingly contradictory, there was a marked increase in drilling activity. My conclusion was and still is that the drop will not be back to 45 or 60 but closer to 85/100.

3) Using XOM as a benchmark, when oil is on the rise, XOM trades at a 1.15/1.20 multiple to oil. This means that if oil is selling at 60, XOM will trade at 60x1.15=69. When oil is stable, XOM trades at a 1 to 1 ratio. When oil is coming down, XOM trades at a 0.85/0.90 multiple. XOM is now trading at 88, so this would be 88 divided by 0.9 = 97. This is how I know that oil is going to correct to 97 or there abouts. This isn't a pure science and I wouldn't bet the house on it, just for the past 25 years has been a reliable directional indicator like brokers use the DIA, which is a totally flawed weighted index...

4) As an investor, fund manager, sell side analyst or whatever title you want to apply, I couldn't care less about GS or Morgan Stanley ripping off the public as long as I can legally, ethically and morally read the market trend ahead of time and use my analysis to the advantage of my clients and myself.

5) As a private citizen, I would demand that anyone who has committed a crime, regardless of stature, be held accountable and reconciled with in accordance to established legal procedures.

6) On a personal level I am a Liberal Democrat which includes the belief that all are innocent until proven guilty. I do not bend my convictions when it is inconvenient for me. I have mentioned to Phil Davis in the past to show more respect to President Bush, not that disagreeing is disrespectful, it is how it is done that matters. If this bothers you, then so be it.

7) Last but not least - just to annoy you ;) - even if I was 100% certain that GS is the mastermind behind this horrific energy bubble and have colluded with certain U.S. politicians, selling out the country to certain Middle East partners and perhaps helped orchestrate the housing bubble with or without the assistance of the former or present Fed chairman, I would still say "innocent until proven guilty".

If we get an undeniable physical surplus, the game is over - at least for now. However, this mini crisis is a sign of things to come. The next time will be for real, no bubble.

Saul Sterman

2008 Jun 17 07:52 PM

[naturalsol:]

brian,

i don't believe any number i didn't reach by my own measurements/calculati... the McCain number was just the first one i came across on a google. Search for yourself.

i looked again and the best estimates are still around 31 billion barrels on the US coastlines.

i'm not making this up!! However, some folks claim we have plenty of oil. Well for the next 30 years or so (at current rates of consumption) including coastlines, and total US fields... I believe it was BP's chairman that stated within the last seven months that the world has 39 years worth left.

energy.pressandjournal...

Maybe its a scam, big oil is distorting prices...I mean seriously who better to mess with the supply end?? But why? ... i don't have any thoughts on that yet...

If the world is approaching the end of easy to get to oil...Think about it ~ Western economies have been built on this stuff, and our "growth" not just maintaing current conditions, is dependent on having more energy... And the world may be staring at the finish line of oil.

whatever.

2008 Jun 18 08:41 AM