As OPEC Holds Production, Oil Moves Toward $150

Whenever the ministers to OPEC are asked if there is any chance they will raise oil production, the answer is "no." Yesterday, the president of the cartel, Chakib Khelil, said “Any increase in production now will not have an impact on prices because there is a balance between supply and demand,’ according to Bloomberg. Oddly enough, word came from International Energy Agency that emerging market use of oil had passed use in the US for the first time. No matter how great the farce, the power of reason cannot change the cartel’s attitude.

Even a relatively small incident like the attack of a Japanese oil tanker sent oil up by $1.

It has occurred to OPEC members that their best play is to do nothing. With crude now above $116 the tens of billion of dollars in extra profits coming to them can be explained away as being caused by speculation and a weak dollar. The fact that demand is still moving up in China, India, and much of the developing world has nothing to do with it.

Part of the perverse hope among those concerned with oil prices has been that an economic slowdown in the West would drop demand enough to undermine crude prices. A quick look at the price of gasoline in the US, now nearing $4 a gallon, gives lie to that. Americans are not driving a great deal more, but they cannot walk to work, school, and retailers. Demand will not fall in the US.

Oil dropped to close to $50 in early 2007, so its price is up 120% since then. It is up 65% since late last summer, and 45% since last fall. The awful thing about these price increases is that it is hard to point to any reason for demand to pull back. Oil is being used more in the developed world, the developing world, and in oil-producing countries themselves. Mexico and Nigeria are building infrastructure and more of their own citizens have cars.

At the same time OPEC is holding the line on production, suppliers of crude like Russia and the US and not pumping more. The Saudis have said the will not make further investment in their oil production facilities after 2009.

An environment of rising prices without significant alteration in supply and demand fuels more rising prices. Oil at $150 is only 30% above today’s price. At the current rate of increase, crude will be there by Fall. As brokers and mutual funds like to say "past performance is no guarantee of future returns". But, oil prices are facing the same dynamics of which have ruled the market for two years.

Nothing is changing.

Douglas A. McIntyre