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.