There’s good news and bad news this week as oil reaches a record breaking $126. But it’s mostly bad.
First the good: OPEC may consider increasing supply. On Thursday OPEC Secretary General Abdalla Salem El-Badri claimed there was no shortage of crude oil, blaming “The turmoil in some global equity markets and the considerable depreciation in the US dollar” for driving investors to oil, pushing up prices. The OPEC countries, responsible for 40% of the world’s crude supply, would not discuss increasing production before their scheduled meeting in September. “There is clearly no shortage of oil in the market,” said El-Badri as futures surged $2 on the news.
But on Friday, a senior Libyan official stated that OPEC may convene an ad hoc meeting before September to increase supply. Shokri Ghanem, chairman of Libya’s National Oil Corp. said ”We would consider, among other options, the possibility of increasing output as a way to ensure market stability.” Nigerian oil minister Odein Ajumogobia also said that while a meeting wasn’t necessary right now, he would support one if it appeared more crude was needed.
Prices didn’t drop dramatically on Friday because Nigeria and Libya’s statements were hazy at best. Saudi Arabia is the only OPEC member able to increase production in the short term and is unlikely to do so before the November elections-one reason for an increase will be helping create bonds between the next administration and Saudi Arabia. Further, NIgeria is in little position to increase production given strikes and rebel attacks significantly disrupting current production.
This seesawing between OPEC’s intentions has investors confused, especially Lehman Brothers Analyst Adam J. Robinson- “They are playing with fire,” he said, wildly grasping for confusing metaphors, ”every time the price goes up they risk killing the goose that lays the golden egg.” This was followed by his vague statement ”Their biggest fear is triggering something they can’t control.” but isn’t that everyone’s biggest fear? That and spiders, or public speaking maybe.
So the good news may not be that good after all, but it’s still a lot better than the situation with Venezuela.
A report in the Wall Stree Journal suggets links between Venezuelan President Hugo Chavez and rebels attemtping to overthrow the Columbian government. Chavez’s support for rebels has always been in question but the WSJ now claims to have conclusive e-mails from the laptop of a dead rebel commander. If the allegations of funding weapons and providing resources is true, America could force sanctions againt Columbia. This would be very bad news for oil prices.
”If we put on sanctions, I’m sure Chavez would threaten to cut off our oil supply,” said Phil Flynn, an analyst at Alaron Trading Corp. “Obviously that would have a major impact on oil prices.” The increase would arise for two reasons: Firstly, the US be forced to buy oil from other countries with higher transportation and processing costs. Secondly, Venezuelan oil would still flow to America through middle men who buy from Venezuela and sell to America., and this extra layer in the supply chain would increase costs.
Venezuela recently increased its reserves by 30% to bring its total to 130 billion barrels, which the country claims is the largest reserve outside the Middle East. If the WSJ’s allegations turn out to be true, America would be forced to choose between even higher oil prices or a loss in political integrity. The American government has not yet released a statement on the links, but given the slate of price increases, maybe no news is good news.
