Taking stock

With oil prices pulling back this week, perhaps not unsurprisingly, from the psychological barrier of $125 a barrel, it's a good time to take stock of where we are and where we're going.

Prices might well come down further today because according to the Financial Times, "Oil markets are adequately supplied, the International Energy Agency
acknowledged on Tuesday, reducing some pressure on the Opec cartel to
pump more oil."  The IEA's monthly report says as long as OPEC maintains current production levels, supply should remain steady for the rest of 2008.

Still, the man in the White House will go hat in hand to Saudi Arabia later this week to make another pathetic plea
to King Abdullah to open up the spigots, although he seems resigned to
getting "no" for an answer.  "When you analyze the capacity for
countries to put oil on the market
it's just not like it used to be," he says. "The demand for oil is so
high relative to supply these days that there's just not a lot of
excess capacity."

Remarkably, the Associated Press tries to take
issue with this, pointing out that "Saudi Arabia has considerable
additional production capacity. It's
pumping a little over 8.5 million barrels a day, compared with about
9.5 million barrels a day two years ago, and has acknowledged the
ability to produce as much as 11 million barrels a day."  What the AP
fails to note here is that almost all of the world's excess capacity is
now confined to one country — Saudi Arabia.  And whether it's actually
capable of living up to its claim to produce 11 million barrels a day
is open to question, seeing as it's already climbed down from previous
claims of 15 million.

I'm just as skeptical as the AP of anything the president has to say. 
(Too bad it didn't exercise that skepticism when his approval rating
was higher and it might have mattered.)  But to then turn around and
take the House of Saud at its word is just nuts.

Meanwhile, back in Washington, both houses of Congress will likely vote today on a bill that would stop Team Bush from topping off the Strategic Petroleum Reserve, on the batty theory that doing so will put enough of a dent in worldwide demand to bring down oil prices, and hence gasoline prices.  Team Bush opposes the idea, but is not threatening a veto; the proposal might wind up being attached to other legislation the president wants to sign.  Perhaps with that in mind, the Bushies are now filling up the reserve at an even faster rate than they were a month ago (a classic instance of chasing the price instead of patiently dollar-cost averaging.)

And what of the long-term supply outlook?  Not good, based on the latest news from the only "elephant" oil field discovery of the last 40 years.  Really, the situation with Kashagan is reaching a point that my eyes glaze over every time there's news about the ongoing taffy pull between the Kazakh government and the western consortium trying to bring Kashagan on line.  Wake me when it's over.

Update: The bill stopping the fill-up of the Strategic Petroleum Reserve has passed the Senate.

Original sponsor of the bill, Senator Byron Dorgan, D-N.D., said it
could bring down prices for sweet, light crude — a high-quality oil in
high demand with refiners — by around 10%. The Speaker of the House,
Nancy Pelosi (D., Calif.) said it could cut gasoline prices by five
cents to 24 cents a gallon.

On which planet?

Oh, but it gets better:

Tim Lynch, a senior executive at the American Trucking Association,
said that even if there wasn't a dramatic drop in prices, "a suspension
of purchases would send a strong message to help restore rational
behavior to the petroleum market."

I don't even know where to begin with this.  What's so irrational about the behavior of the petroleum market?  If the suspension of purchases would be by his own admission a symbolic gesture, what difference would it make?  And wouldn't a commitment on the part of the Fed to stop debasing the currency make more of a difference?


The Daily Reckoning