Oh, what a sight it was on Monday when trading on the basis August light sweet crude futures contract on the New York Mercantile Exchange (NYMEX) broke the psychological $60.00 resistance level to $60.02. Think back… It was only a few weeks ago that the August contract was trading at $49.05, caught in a short-term downward trend. However, the last four weeks have seen oil prices attract some strong buying amid capacity and demand concerns.
Now, as I have alluded to in past commentaries, and, as you all know, surging oil prices are a concern. We pay more for gas and travel, airlines pass on the price increase to consumers, courier services include a fuel surcharge, and so on. You cannot escape higher oil prices.
In fact, any business that relies heavily on oil and gas as a key expense will inevitably pass the cost to you. When I order pizza for delivery, they nail me with a $2.00 delivery charge, despite the fact that the store is only a few blocks away. Perhaps I will go and pick up the pizza myself next time.
The breaking of the $60.00 resistance level is a concern, as it will hit you hard where it counts–your wallet, especially as the traditional summer driving season shifts into high gear.
If the price is sustainable above $60.00, it could set the stage for another surge. Now, you may think current price levels are atrocious, but keep in mind that $60.00 a barrel is still well below the inflation-adjusted highs in excess of $90.00, which were established in 1980. At that time, the Iran/Iraq conflict drove extreme price surges, as Iraq invaded Iran in September 1980. This negatively affected oil production in both countries. In fact, a quarter of a century later, oil production in Iran is only two-thirds that of the production achieved when Reza Pahlavi ruled Iran as the Shah.
The reality is that a trend of higher oil prices is only good for energy companies, which have seen their market value explode in the past few years.
The Organization of Petroleum Exporting Countries (OPEC) said it does not want prices to be excessive. OPEC will increase its output target by 500,000 barrels a day. However, this is nothing new and, in my view, is only a public image move to show the world it is concerned. In actuality, OPEC is already producing above the current production and is near capacity. The oil cartel is producing about 30 million barrels a day or about 35% of global demand.
Given the current capacity and demand issues, any signs of shock to the oil system will cause prices to surge. The current price trend is bullish and suggests higher prices ahead, although the market is technically overbought, so we could see some near-term selling pressure.
On the demand side, the demand for gas for the summer driving season will soon kick into high gear. As well, rising demand from oil-hungry countries, such as China and India, is on the rise, creating another challenge for producers. The situation could be aggravated with the threat of a strike in Norway, the world’s third largest exporter of oil, along with continued problems in Nigeria.
So, get ready for even higher prices. They could be just around the corner.