Crude Oil: Increased Production, Increased Price Targets

Posted by Bull Bear Trader | 6/16/2008 08:27:00 AM | | 0 comments »

As reported at Arab News, and commented on at Bloomberg, United Nations Secretary General Ban Ki-moon is saying that Saudi Arabian King Abdullah "... acknowledged that the current oil prices are abnormally high due to speculative factors and he is willing to do what he can to control it.”


Video Source: Clip Syndicate Bloomberg

Saudi Arabia had previously offered to increase production in June by 300,000 barrels, and may now increase production by 500,000 barrels in July. Given that Saudi Arabia is one of the few countries that has idle capacity and can actually raise production, this could certainly help in the short-term.

Nonetheless, even with the news of increased production, crude oil prices were still up sharply this morning in futures trading. While the crude oil markets are volatile and seem to have a mind of their own, the current news may be a reflection of a few realities. First, there is only limited idle capacity that can be brought to market. If the world were to suffer another shock, given a political or weather-related oil field or pipeline shut-down, it may be difficult for the markets to make-up reduced capacity in short-order, quickly putting pressure on prices. Second, the increased crude oil that is being placed on the market is not the light sweet crude that is demanded and driving price.

Of course, prices may also be reacting to recent calls by analysts, CEOs, and speculators, such as the one made by the CEO of Gazprom (see Bloomberg article), forecasting $250 a barrel for crude oil in the "foreseeable future." The call is more of a worst case scenario, and certainly is not unbiased, but does reflect the current mood of the crude oil market. T. Boone Pickens recently called for crude oil to reach $150 a barrel over the summer (when it was around $120), only to see the price spike higher. Recent calls such as this bring back images of the dot.com bubble in the late 1990s. During this rush, all things technology and Internet-related were doubling on a regular basis, with many stocks reaching new analyst annual forecasts in a matter of weeks. A $100 stock that was forecast to reach $180 over the next year often found its market price close to the new $180 target in just a few trading days. While I am still a skeptic as to how much speculators and not supply and demand are driving the crude oil market, calls such as the one recently made by the Gazprom CEO are not helping to stabilize the market, and are certainly enticing some momentum traders to take positions and enter the market.

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