Obama’s stirring speech and clear direction on energy policy caused prices for oil and gas to plummet! Whoops! April fool! Oil Prices did not fall and the President is hoping that by some twist of fate oil prices could fall faster than his approval ratings. Of course that has about as much chance of happening as his March Madness Picks had of making it to the final four. In the meantime in the real world, oil continues to rise jolted by a weak dollar and rising concerns not only surrounding Libya but Bahrain, Kuwait, Syria and Yemen. In what is being called the Arab spring the market focused on where we might lose oil next.
In Bahrain reports of more arrests and the government going door to door is raising anger not only in Bahrain but in Kuwait and Iran. This is now becoming more of a religious struggle with tensions between the Shiite majority wanting to get rid of the Sunni leadership. The crackdown and the fact that Saudi Arabia sent in forces to help with the crackdown, is inflaming Shiite anger throughout the region. In Kuwait, three Shiite cabinet members resigned after being refused the right to question members of the ruling family surrounding ties of corruption regarding Bahrain. Amir Sheikh Sabah Al- Ahmad Al-Jaber Al-Sabah accepted the resignation of the cabinet yet asked them to stay on until they could find replacements. Kuwait tried to lower tensions by offering to mediate the dispute in Bahrain, an offer that was flatly rejected.
In Libya advances by Gaddafi forces seem to suggest that the hopes of a quick return to normal Libyan oil production are out of the question. As expected Libya has had a negative impact on OPEC production. A survey by Bloomberg News showed that OPEC production fell to a 49-year low as OPEC failed to make up for a decline in Libyan oil production. Bloomberg estimated that OPEC production fell 1.2% or 363,000 barrels to an average 29.022 million barrels a day, the lowest level since September, according to the survey of oil companies, producers and analysts. Daily output by members with quotas, all except Iraq, decreased 353,000 barrels to 26.437 million, 1.592 million above their target. The Saudi’s did boost production by 300,000 barrels sending their production to the highest level since March of 2008 which was about the same time oil prices were that high. Well pretty close anyway as prices are at their highest since the month of September of 2008 when we saw prices hit a high of approximately $130 a barrel, a number that oil traders may want to keep in mind! Got it? Good.
Saudi Arabia is spending big money to keep a lid on discontent and according to estimates by the Institute of International Finance, Saudi Arabia is going to need $100 barrel oil by the year 2015 to meet its growing budget just to break even. In fact now the Saudi’s will need $88 a barrel this year that just a few years ago was a number that the Saudi’s thought would damage the global economy. Now they need it to keep the family in power.
We have been targeting $108 to $110 in oil and we could see $108 today. It is possible that we may see a pullback from that $108 level especially if the market is convinced that the Fed may really be serious about tightening monetary policy. Yet with gas prices at record highs and the price of oil getting overbought we may see a quick correction next week and then on to perhaps the $110 area.
In an interview with the Wall Street Journal, “The president of the Minneapolis Federal Reserve Bank said Thursday the Fed may need to increase short-term interest rates by year’s end if underlying inflation rises as he anticipates.” The Journal goes on to say, "Narayana Kocherlakota said he expected "a big upward movement" in core inflation —inflation excluding volatile food and energy prices — from about 0.8% late last year to about 1.3% by yearend. As a result, he said, it's "certainly possible" the Fed's target for short-term interest rates, now near zero, would be lifted by more than half a percentage point late this year." He also said that, “Mr. Kocherlakota, a former academic, also said that the Fed's second-round of bond buying — known as QE2, short for quantitative easing — had a bigger impact on the economy than he thought it would when it was launched last year.” He should have called me or read my energy report and I could have told him.
Gas prices hitting record highs for this time of year and are going higher. April is a very bullish month and with the switchover to summertime blends, it should raise the national average to near the $3.75 area. By Memorial Day if oil isn’t broken down by the Fed and unrest spreads we might see $4.00. That is no joke.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.