oil soars - dow sinks

"Wednesday, May 12, 2004



Shall we dance? The tap dance tap out! Oil prices surged over $40.00 per barrel when a stunning admission came out from the Algerian Oil Minister! He confirmed what many have suspected that the only excess production capacity to be had in OPEC is in the hands of Saudi Arabia. What this means is if Saudi Arabia makes good on their promise to increase production by 1.5 million barrels per day, OPEC will be tapped out with no excess to draw on. We're using all there is.



Most theorize Saudi Arabia has roughly 2.0 million barrels in excess capacity. If they raise production by 1.5 MB, they'd have precious little left, maybe 500,000 barrels. And that's the entire cartel of OPEC! In this world of geo-political unrest, 500,000 barrels is a small drop in the barrel. Scary situation.



So when traders heard the comments from Algeria, it became quite clear the Saudis were in a desperate situation as they attempted to jaw bone the market lower and keep it under $40.00. And it's also unlikely the Saudis will want to push their production capacity to its limits leaving them exposed with little or no insurance production left in their back pocket. The Saudis tap danced around $40.00 as fast as they could but Algeria pulled the rug out from under them and oil broke above $40.00.



And here comes the Department of Energy and they are raising price and demand forecasts. We have said in the Energy Report that the last increase from the DOE was underestimating the growth in demand and now the Energy Information Agency is confirming this strength. The DOE raised its forecast for the price of gas for the summer drive season by 18 cents and now says the national average will peak in the $2.03 per gallon area. The Energy Report forecasted $2.00 many months ago. This is worrisome news about the price of gas but the real startling news comes about electricity demand.



The IEA raised their demand estimate for electricity by 1.4%. We think this will be too low. We believe that having the IEA even acknowledge a jump in demand means summer demand will go through the roof! The natural gas markets looks like it's getting the message and the surge yesterday led the way for the entire complex." (Alaron Energy Report)