I am closely watching where crude oil prices settle for the week. We had been trading in a range between $132 and $138 per barrel, since June 6th. From a consumer’s perspective, I had been hopeful that the failure to assault the $140 level would allow for prices falter, at least for a while. Unfortunately, Thursday’s move above $138 represented a breakout, with even higher prices virtually assured, particularly if prices settle above $138 on Friday.
A combination of factors has renewed the rally and bullish outlooks. In my view, the Saudi Arabia oil summit was a bust. Saudi Arabia came up a short, in terms of additional supplies to the market, immediately, and in terms of their future production. Saudi Arabia should have raised production to 10 million barrels per day – they raised it 9.7 million. And they should have announced concrete plan to raise productive capacity to 15 million barrels per day. The plans are to get to 12.5 million barrels, while they merely consider a move to 15 million from today’s 10.8 million.
There is hardly unanimity among OPEC members about the state of supplies. Libya, on Thursday, threatened to withhold barrels from the market saying supplies are ample.
The blame game continues apace, particularly as it relates to speculators in the market. I make the observation that if there was such an abundance of crude oil and refined products – if you truly could not give it away – prices would reflect this condition. When we see data-points such as China becoming a net importer of gasoline for the first time and increasing its heating oil imports by a factor of 34 (that’s not a typo), it’s pretty clear this is not the case.
The global economy is in the midst of a real bad time. Goldman Sachs placed General Motors and Citigroup on their “Conviction Sell” list; I suppose they’ll add apple pie next. The CEO of Dow Chemical manages to spin 25% price increases as good news, when, in fact, he is inflation incarnate. As hard as it might have been to swallow, the Federal Reserve should have raised interest rates, in an attempt to slow the inflationary spiral that is currently underway.
The lack of confidence in the equity markets is causing investor to seek haven in hard assets like crude oil and gold, once again. It’s hard to tell what will reverse this sentiment. A Fed rate hike might have nudged us in that direction.
This energy crisis is real and painful for many consumers. The politics should be put aside on this one, and a realistic approach needs to undertaken: an approach that encompasses more production and a structured approach toward transitioning out of fossil fuels, especially for transportation and electricity generation.
Unfortunately, things look to get worse, before they get better.
John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.