This article suggests oil will stay up through the winter. Just imagine if we have a cold, harsh winter too.
I think it would be crazy to sell CUX at this point. It can only keep going up as the production increases...
Oil Prices to Breed Discontent This Winter
Summary
The price of crude oil rose to more than $32 per barrel on Aug. 15,
reaching a 10-year high. While the upsurge was attributed to a
comment made by Venezuela's president, it actually reflects current
market conditions. An increase in oil production by the
Organization of Petroleum Exporting Countries (OPEC) would help
alleviate prices but is unlikely to occur. High energy prices will
persist through the winter and affect every sector of the global
economy.
Analysis
Crude oil prices rose to more than $32 per barrel on Aug. 15. The
price spike was widely attributed to a comment made by Venezuelan
President Hugo Chavez that oil producers should not allow prices to
drop below their current levels. Chavez is currently touring
nations that make up the Organization of Petroleum Exporting
Countries (OPEC) in preparation for a September heads of state
summit in Caracas. However, the price spike actually reflects
current market conditions. High energy prices, which will affect
every sector of the global economy, are likely to continue
throughout the winter
The only dependable method of attaining relief from high oil prices
would be to increase production. Saudi Arabia announced in early
July that it would unilaterally increase production by 500,000
barrels per day (bpd). However, according to the U.S. Energy
Information Administration (EIA), Saudi production has only
increased by 150,000 bpd. Since global demand tends to slacken in
the autumn, OPEC will be reluctant to boost production. As well,
individual members of OPEC have recently opposed increases; when
Saudi Arabia announced its decision to boost production in July, it
faced a solid wall of opposition.
Consequently, the global economy faces a dual threat from flat
supplies and diminished stocks. U.S. crude stocks are at a 24-year
low. More importantly, low gasoline stocks in the United States and
Europe are pushing refineries to favor gasoline production at the
expense of heating oil.
Last winter, heating oil stocks were already at a 10-year low. This
winter, American and European deficits will be 50 percent and 20
percent worse, respectively, according to the International Energy
Agency. Reflecting this crucial shortage, the price of U.S. heating
oil hit a six-month high this week - and this near the end of the
summer, when demand is generally at its lowest.
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These price crunches will lead to higher prices for other petroleum
products, as well. Already, U.S. natural gas producers are
expecting a 50 percent increase in prices this winter.
Higher energy prices will hit every sector of the global economy,
but the damage will not be uniform. In Europe, various energy taxes
already constitute more than 80 percent of the price of gasoline.
As a result, gasoline prices begin from a level about triple that
of U.S. prices. An additional 30 cents on a $4 gallon of gasoline
in London is not nearly as noticeable as an additional 30 cents on
a $1.2 gallon of gasoline in New York. Europeans are also used to
paying far more for natural gas, so again, the rising prices won't
be shocking.
The United States, with its preference for cheap energy, lacks this
safety mechanism. Any increases in price will hit far harder in
percentage terms. While the U.S. economy grew at an impressive 5.2
percent in the second quarter, higher energy prices could still
trigger the inflation that Alan Greenspan fears. The United States'
depleted energy reserves will only exacerbate this problem.
But it is the developing world that will be the hardest hit. Oil
demand in Asian states alone has already increased by almost
600,000 bpd in the first half of the year. And most Asian states
lack substantial energy reserves or significant energy taxes. This
all makes them far more susceptible to price shocks. Any rise in
crude prices will directly impact their still-fragile economies.
Unless OPEC agrees to a significant production increase during its
September meeting - a highly unlikely event - the world will face
sustained high prices and energy-induced inflation, especially in
developing economies.
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For more on the Middle East & Africa, see:
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Editor's Note: The Weekly Analysis of Aug. 14, 2000 inaccurately
depicted the size of the globe's population, which is 6 billion
people. The error was made during editing.
(c) 2000 Stratfor, Inc.
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