During this normally seasonally weak period for oil, the price of West Texas crude has dropped
by $23 bl. to around $92. The Saudis have boosted output to 8.8 mil. bd, and there is now talk
from the kingdom that they are prepared to boost production to a little over 10 mil. bd. to stabilize
the market. The OECD countries let their carry stocks run down from nearly 60 days carry to 50
as the producers ran lower cost crude through refineries to pop profits. This has prompted the
IEA to disclose that major OECD consumers are going to release 60 mil. bl in Jul. from strategic
reserves to provide modest carryover cushion. The bigger issue on the supply side is whether
the Saudis are willing to show their hand on spare capacity / larger production.
It is an important matter. It is no coincidence that MENA political upheavel has come in the wake
of a deep global economic downturn. Further economic destabilization from a fast rising oil price
may, if such occurs, lead to additional socio-political blowback which the Saudis might find harder
to manage. Wisdom suggests that if the Saudis can produce substantially more oil, that they do so
either later this summer or early next winter, for continuation of a fast rising oil price will eventually
create additional destabilization.
The oil price at $92 is down to test the cyclical uptrend line from early 2009. The bulls in the
trading pits may try to make a stand here. With seasonally weak demand still in place, and with a
smaller than now commonly forecast seasonal rebound in store as the summer progresses, oil
could have up to $15 bl. additional downside near term, especially if the Saudis are seen as
boosting output above the recent 8.8 mil bd level.
West Texas oil.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!
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