Oil Prices: Headed Up or Down?

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

Oil Prices: Headed Up or Down?

by David Fessler, Investment U's Energy and Infrastructure Expert

Tuesday, June 14, 2011

Are oil prices headed up or down? If Saudi Arabia has anything to say about it, quite possibly down. Over the past several months, the kingdom has been clandestinely raising production levels. It's been undertaking this in advance of Wednesday's OPEC meeting.

It's attempting to placate American, Chinese, and European oil consumers. According to an article in the Financial Times, the Saudis want to bring crude prices down to more "comfortable levels," i.e. $80 to $90 per barrel.

The FT says Saudi Arabia raised its May output by 200,000 bpd, and has plans to raise it another 200,000 to 300,000 bpd this month.

That would peg its overall output above 9 million bpd for the first time since 2008. With global refinery demand for oil on the rise, especially from China, the increase couldn't come at a better time.

Why is the demand from refineries increasing? It's the end of their annual spring refinery maintenance shutdown period, when refinery outputs are traditionally at their lowest points of the year. During outages, demand for oil lessens. Just the opposite happens when they restart operations.

But part of the rise is due to the Saudi's own power requirements. It's hot in the desert, and air conditioning loads go up dramatically during the summer months.

Nine million bpd is about 1 million bpd more than the low point (8 million bpd) reached when the Saudis cut demand in response to the worldwide recession back in February of 2009.

OPEC's Contentious Cartel Meeting Coming

Wednesday's OPEC meeting will likely be contentious and argumentative. Shady cartel characters Venezuela and Iran will likely argue for no production increases to keep prices high.

In addition, Libya is managing to send a representative, Omran Abukraa, even though its output has been reduced to a mere 200,000 bpd. He's the former head of the country's national electric authority.

The Libyan oil minister, Shokri Ghanem, defected last month and has aligned himself with the rebels. While they control much of the country and some of its current oil output, the rebels will have no representation at the meeting. Prior to the crisis, Libyan crude oil output was 1.6 million bpd.

Ironically, Qatar and the United Arab Emirates – both OPEC members – have openly announced their support of the rebels.

That will make for increased political tension in what was already seen to be a very difficult meeting.

What Should Investors Do?

In a word, nothing. Until the OPEC meeting is over and a production quota agreement is reached, traders are all being cautious. Investors with short-term investment horizons should exercise the same caution.

Longer term? Any pullback in the price of oil is going to be temporary. Middle East tensions aren't slacking off, and neither is the demand coming from China. As the U.S. recovery lollygags along, demand has remained relatively constant.

Investors should use any pullback in the price of oil-sensitive refining stocks like ExxonMobil Corporation (NYSE: XOM), Valero Energy Corporation (NYSE: VLO) and Tesoro Corporation (NYSE: TSO) or big producers like Petrobras (NYSE: PBR) and Anadarko Petroleum Corporation (NYSE: APC) to accumulate shares.

Skeptics will argue that Brent Crude continues to trade in the same range it's been in for the last 4 months: $105-125 a barrel. One thing is a sure bet, though: global demand for oil will continue to head in one direction: up.

Good Investing,

David Fessler

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