Kilduff: $150 Oil ... A Snowcone in July?
Energy prices continue their rise, and why not? They continue to get support from every quarter that determines their calculus. The round robin of factors is familiar to anyone that has paid attention to the rise: global security issues, unrelenting demand strength from Asian nations, and the weakness of the US dollar, among the financial levers.
The extensive speculation over a possible Israeli attack on Iran’s nuclear facilities set off a renewed speculative fervor over what a post-attack crude oil supply landscape would look like. It’s not pretty. Iran’s Foreign Minister, Manouchehr Mottaki spoke of a line of fire from Lebanon to Tehran, across the Middle East, in an attack’s aftermath. The shutting the Strait of Hormuz by Iran, disrupting one-fifth of world supplies, is a given, in the scenario analysis.
In a disappointment for the hopes of consumers, the energy market failed to take some obvious clues from Washington and the very same Iranian official. Diplomacy was clearly emphasized in all the various commentary of President Bush and others.
On the fundamentals of supply, the chief concern continues to be the family of diesel fuels. Yesterday, in the government’s weekly inventory report, distillate fuels failed to increase at the levels expected, and there was an increase in diesel demand, despite pump prices hovering near $5.00 per gallon in many locations. (See more of Kilduff's discussion in the video).
The dollar is exhibiting some strength, and it may actually continue to do so, in my view, in a sort of an addition by subtraction fashion. Growing economic weakness in Europe and the slavish approach of its Central bank to fighting inflation, despite the risks to growth, could spark a race to the bottom, where the dollar does not look as bad, relatively speaking.
I think, however, until China finishes putting the final touches on dressing herself up for the Olympics, the demand growth story there will remain compelling, if not down right startling.
China is providing massive subsidies to its populace and it’s major refiners. Despite their large currency reserves, the government is already weighing a rollback of some of the most recent subsidies, involving crude oil import duties. I expect China to visit a reality price-check on the country, after the games. If this happens, it may finally lead to lower overall prices.
Going into the Fourth of July weekend, a tropical depression has formed in the eastern Atlantic ... more bad news for consumers.
Chart traders have no reason not to continue buying, at this point. The crude oil chart presents a classic bullish picture with more to go.
Is there any hope for a price break? Possibly. The US and European stock markets, increasingly, are foreshadowing an extremely poor economic environment, and losses in China’s markets are now legion. $150 crude oil seems a virtual certainty, but it may prove as fleeting as a snow cone on a hot summer day.
John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.