Written by Michael Vass

Well it would seem that I am wrong and right. Both of which seem to be occurring sooner than I would have ever imagined. And the implications of this is going to have repercussions for quite some time.

With crude oil closing above $100 on Tuesday I am proven right in my expectation of an increase in the price. But I am incorrect for the reasoning and timing. It was my expectation that OPEC would cut production and this would help to fuel further price increases on the New York Mercantile Exchange. The OPEC meeting is on March 5th, and there are still expectations that production will be curtailed. So this may fuel even higher prices.

The cause of this sudden rise was not my presumption of actions in Venezuela and Iran either. It in fact is directly connected to the refinery accident in Texas on Monday. The refinery handled 67,000 barrels of oil a day and as such will have an impact rather quickly in the U.S. This explosion was a tragic accident that could not be expected nor factored.

But in looking at the results from this and the comments over the weekend of Hugo Chavez there are some things we can understand. Chavez, by the way, has backed off his threat to cease sales to the U.S. Obviously the threat was not a major problem for the U.S. as others nations were willing to cover any gap and the total volume from Venezuela is not enough to impact the nation. Cutting sales would impact Venezuela though. In addition I would imagine that Iran was not willing to back their friends in Venezuela on this matter.

According to AAA and the Oil Price Information Service the price for gasoline hit a national average price of $3.032 a gallon. Expectations by the Energy Department target the cost per gallon to exceed the $3.23 that was reached last May in this year. This expectation seems to be a forward indicator of higher crude oil prices, and futures contracts seem to support that theory.

I previously mentioned

“Beyond this scenario the more likely thing to expect is that OPEC will be cutting production levels during the March 5th meeting. Without a dramatic downturn in the U.S. and world economies, in that order of importance, a return to $100 a barrel will likely happen again for a brief period before the summer and then drop back into the mid -90’s. But I believe a surge will occur along with a resurgence of the American economy in the 3rd and 4th quarters. I will say that by the end of 2008 oil breaking $110 is likely.”

Without accounting for the unforeseeable, there has been nothing that has changed except the accelerated increase in crude oil prices and futures contracts. Given that, I continue to stand by my outlook, with one change. I expect that the short-term prices will likely run to about $110 before backing off. My new target, adjusting for this accelerated move in prices, is that by the end of 2008 crude oil will exceed $125 - $130.

Hopefully there will be no more tragedies for the entire year that could accelerate this move higher.

Written by Michael Vass

Crude oil prices have been on a seesaw of volatility, most notably since hitting $100 a barrel in January of this year. Since that time there have been recession fears in America, massive rate cuts by the Federal Reserve, horrendous losses by most financials due to the mortgage sub-prime loans, and drops in the stock markets to near bear levels. That says nothing of the current growing battle between Venezuela and Exxon.

Overall the pressure has been on the downside of pricing, as many of the indicators express a likelihood of reduced demand as industries slow down. Yet not all the pressure is one sided. And the economic outlook is seen as not as bleak as once thought.

“The market has been struggling with whether we are recession-bound or not,” John Kilduff, senior vice president for energy at brokerage MF Global in New York said. “That’s an indicator [Japan’s economy] that whether or not we are, there’s some life out there in the rest of the world and energy demand could hold up.”

It’s this factor that has added to the price of crude oil recently, topping $95 a barrel on February 14th. But I think there is an aspect that has yet to be factored into the market. That factor has nothing to do with Federal Reserve Chairman Ben Bernanke’s thoughts the U.S. economy will rebound at the end of the year. It has little to do with the lack of effort of states like Michigan to create a renewable portfolio standard. It has everything to do with Venezuela.

It’s a given that the 90,000 barrels of low quality crude exported by Venezuela to the U.S. is a fraction of what the nation used. The threatened cut of sales to the United States is more likely to have a negative effect on Venezuela than effect America or impact crude prices significantly. But it’s the ally of Venezuela, or more accurately the ally of Hugo Chavez that matters. That ally would be Iran.

Iran is a major oil exporter, and no friend of America. In recent months there have been several conversations of mutual support between Iran and Venezuela, and condemnation of the U.S. It is this mutual anti-American sentiment that could drive up prices beyond an OPEC reduction in supply might create.

If the current court actions continue to favor Exxon over Petroleos de Venezuela, and negotiations fail with ConocoPhillips causing them to follow in Exxon’s direction it could start a landslide against that nation. In the face of that kind of pressure, and the refusal to sell oil to America, Iran may join with Venezuela in a stance against America. This combination of political action and national leadership prejudices is an unknown that I have yet to see any analyst or blogger mention. It’s probable that the reason for that is the unlikely nature of it coming to pass. But unlikely is not improbable.

Beyond this scenario the more likely thing to expect is that OPEC will be cutting production levels during the March 5th meeting. Without a dramatic downturn in the U.S. and world economies, in that order of importance, a return to $100 a barrel will likely happen again for a brief period before the summer and then drop back into the mid -90’s. But I believe a surge will occur along with a resurgence of the American economy in the 3rd and 4th quarters. I will say that by the end of 2008 oil breaking $110 is likely.

Now let’s see if this comes to pass.

Read this:

When you have an increase in demand and increase in costs, conventional economics usually predicts a rapid rise in prices.

Oil futures closed lower today after the Energy Information Administration (EIA) surprised the markets with a report that inventories jumped by 7 million barrels last week. Analysts surveyed by Dow Jones were expecting an increase of 2.6 million barrels.

Light sweet crude for March delivery fell $1.27 to settle at $87.14 on the NYMEX on volume of 259,716. High prices and concerns regarding the economy are all hurting demand for oil. A warm winter in the Northeast and a slowdown in manufacturing sector has also reduced the demand for oil.

Light sweet crude oil for March delivery rose today after strong factory orders were released by the Government early in the trading day.

Despite today’s direction, the oil markets remain cautious because of the concerns regarding the U.S. economy.

Light, sweet crude for March delivery rose $1.06 to settle at $90.02 a barrel on the New York Mercantile Exchange.

A temporary closure of the Houston Shipping Channel, closure of a ship channel near Port Arthur, Texas and increased violence in Northern Iraq and Nigeria also brought buyers in the market today.

Despite the move higher, Friday’s payroll report still weighed on the minds of most traders.

Oil futures briefly traded below $90 a barrel today after the weekly inventory report showed an unexpected increase in inventories. Analysts surveyed by Dow Jones were expected an increase of 300,000 but the report showed an increase of 4.3 million barrels which surprised many traders that we spoke to on the floor.

News regarding the U.S. economy has been the main driver behind the drop in crude prices but today, prices were affected by the inventory report and by some analysts’ statements concerning the forecast of world oil consumption for 2008. Many traders now believe that the forecast will be slashed sometime soon.

Crude oil prices were also under pressure today after the Secretary-General of OPEC said the group may move more oil into the market if the market conditions require more oil over the near term.

After trading higher earlier in the day, oil futures closed slightly lower. Prices jumped earlier in the day after a report was released that forecasted a decrease in daily shipments of 230,000 barrels per day by OPEC.

Prices then moved lower after investors saw a Conference Board Report that its index of leading indicators dropped to the lowest level in 2 years.

One floor trader remarked, “An economic slowdown is the greatest fear that the energy markets have right now but the inventory data is leading to the uncertainty.” Light, sweet crude for February delivery fell 18 cents to settle at $91.06 on the New York Mercantile Exchange.

Recently, the energy markets have had to digest conflicting data which has added to the choppy trading. The U.S. Energy Information Association reported on Wednesdaythat supplies of heating and crude oil fell sharply last week.

A report from the National Oceanic and Atmospheric Administration that the first part of the winter will be warmer than normal in the eastern two-thirds of the country also added to the slight losses for the trading section.

The light sweet crude oil contract for February closed up $1.16 cents to $91.24 a barrel on the New York Mercantile Exchange on Wednesday after the weekly inventories report for the week ended December 14th showed that inventories dropped for a fifth consecutive week. Inventories dropped by 7.6 million barrels while analysts surveyed expected a decrease of 1.5 million barrels.

In news from China, the China Petroleum and Chemical Industry Association reported on Wednesday that the country’s crude oil output would reach 186 million tons in 2007, up 1.5 percent year over year. For the first 11 months, imported oil stood rose 14.8 percent as compared to 2006 to 147 million tons.

Said one trader in New York, “A warm welcome from the new OPEC President.”

The incoming OPEC President said this weekend that OPEC may increase production at their next meeting in February. OPEC’s next meeting is February 1st and a main focus of the meeting will be an implementation of strategy on how to meet world demand.

Over the past 3 days, the concerns about projected U.S. economic growth have overshadowed events in Northern Iraq and Nigeria and weather-related news. Some traders in the equity markets have blamed the uncertainty in the oil markets for the lack of direction in the equity markets.

Light sweet crude for January delivery fell 64 cents to settle at $90.63 a barrel on the New York Mercantile Exchange.

Oil bulls sent oil prices back above US$90 a barrel but oil remained in a trading range as the Fed eased rates by a 1/4 point in an anticipated move. Earlier in the day, Light, sweet crude for January delivery on the New York Mercantile Exchange traded as high as $90.55 but was unable to break resistance at $90.73 as oil remained in the trading range which it has been for the entire month.

One trader commented that the market obviously anticipated the Fed move but weekly inventory statistics would have to be the impetus to move the market out of the range. The Energy Department is scheduled to release its report tomorrow at 10:30AM EST. Other traders saw the Fed move as a neutral event since the Fed move would have a dragging effect on the dollar but would also bolster the U.S. economy. Earlier in the day, news about pipelines in the Midwest being shut due to severe weather sent prices higher.

In other news, the Energy Information Administration said in a report released on Tuesday that supplies will tighten as the EIA expects inventories of the U.S. and other industrialized nations to drop to 49.3 days of expected supply by next February.  Global petroleum use will increase next year from 1.38 million bpd to 87.16 million bpd according to the Agency.

Crude oil prices rose over $3 to reach the highest prices since November 30th. The move came on the heels of news released yesterday by The Energy Department that supplies had their biggest one week drop since 2004.The drop in crude-oil supplies left inventories at the lowest level since March 2005.

The falling dollar and the outlook on Chinese economic growth also contributed to the move. Many traders in New York also explained today’s rising prices to a sense that prices had just dropped too quickly. Crude oil traded over $99 early last week.

These comments about Iran by Secretary of State Condoleezza Rice also sent crude prices higher

“Indeed international pressure and international scrutiny can and might lead them to make healthy choices”

Crude oil traded lower today after a report was released by the Energy Department showing that heating oil and gasoline stockpiles increased. The report also showed that U.S. Crude inventories were down 8 million barrels equaling the lowest inventory in three years.

There was a lot of news for the energy markets to absorb as OPEC announced there would be no change in daily production from the member nations.

The report that U.S. gasoline supplies rose by 4 million barrels surprised the markets as analysts were expecting an increase of 950,000 barrels and distillates unchanged. Distillate stocks which include oil and diesels stockpiles increased by 1.4 million barrels.

Speculation to what OPEC will do regarding its decision to increase daily production has added to the volatility in the crude oil markets. One trader told Crude Oil Futures Blog that the decision from OPEC will give the oil markets some needed direction. Although the markets are expecting an increase, there have been mixed messages from the members. OPEC will meet starting tomorrow in Abu Dhabi to decide on daily output for early 2008.

News out of Iran regarding nuclear production also weighed on oil markets.

Crude oil traded this morning to a five week low as fears intensify over the expected increase in daily production by OPEC which is expected to be announced at the December 5th meeting. Traders at the CBOE are also worried about an expected slowdown in the U.S. economy heading into 2008.

One trader told Crude Oil Futures Blog that there still a perception on the floor that another shoe will drop in the real estate market which will slow growth in the first half of 2008.

The Street is hoping that OPEC will increase production by 500,000 barrels per day but the Saudi oil minister said last week that the sentiment is to maintain production levels where they are.

Crude oil futures are continuing their roller coaster ride this morning as futures traded below $90 a barrel in the first time in over a month. Analysts blamed several factors over the more downward including a slowdown in the U.S. economy. Others blamed traders that bid up futures over an over-exuberance over the Chinese economy. “It’s not a bubble over there but there are some signors of a pinhole in the bubble,” remarked another.

In addition to the concerns over the U.S. and Chinese economic outlook is the December OPEC meeting in which most traders are expecting OPEC to authorize an increase in per day production.

An economic slowdown in the United States would hurt oil prices because the U.S. consumes 25% of the world’s oil.”

After reaching an all time high of $99.29 last week, WTI crude prices for January delivery were down over $2.00 as speculation grew that OPEC would increase production. The speculation comes on the heels of the Saudi Oil Minister’s announcement that the oil state had increased production to 9,000,000 bpd. The announcement by the Saudi’s along with comments by the Iraqi Oil Minister Hussein al-Shahristani  in an interview with Dow Jones that OPEC is likely to increase production by 500,000 bpd should put continued pressure on the markets.

Many analysts are now starting to believe that the recent attempt to break the century mark may prove to be anti-climactic after OPEC’s December 5th meeting. “Will only gets you so far,” said one analyst about the recent rise of WTI to near $100 pbd. Many energy traders are concerned that speculation on the expected slowdown in the U.S. growth outlook for 2008 could continue to put pressure on oil prices over the near future.