Saudis Hold Key to Future Oil Prices

March 25, 2011 04:06 AM

Producers looking to lock in spring and fall energy needs should be watching the prices of Brent crude oil and heating oil closely. The April futures contract price for heating oil, used in the production of diesel fuel, soared from $254 on Dec. 31, 2010, to $306 in late March.

“If heating oil drops to $250 or $270, those would be good buying points for fall needs,” says Les Klukas, crude oil trader for Country Hedging in Saint Paul, Minn. For producers who have yet to lock in spring needs, he suggests buying on short-term price weakness.
Heating oil, thus diesel fuel prices, have climbed in tandem with Brent crude oil prices on heavy demand in Europe due and continued unrest in the Middle East.
Prices on West Texas Intermediate crude oil, the product traded on the NYMEX exchange, have been running about $15/barrel below the Brent crude oil price. Diesel prices on the West Coast of the United States are based on the Brent price, while Midwest diesel prices are based off the West Texas price, making diesel fuel less expensive in the Midwest.
“I’m looking for consolidation to take place in the $100 to $110 price range for West Texas crude,” says Klukas. If unrest in the Middle East settles down, he thinks prices could fall by 10 percent or more to $90/barrel. “We had good resistance at $90 on the way up.” Then, political discontent heated up in the Middle East, sending crude to $106/barrel.

Is oil headed to $200/barrel?

Klukas and others warn, however, that uprisings in Saudi Arabia could destabilize the oil market enough that prices could head much higher. How much higher? Klukas thinks $150/barrel, a new record high, could be possible.  Société Générale, a major European financial services company based in Paris, warned earlier this month that Brent crude oil could reach $200/barrel if unrest in the Saudi Kingdom were to reach severe levels.
“The Saudis do not want to see Bahrain go into turmoil. It’s too close,” says Gregg Hunt, analyst with Archer Financial Services, Chicago. Bahrain is a small island country off the east coast of Saudi Arabia. Hunt notes that the Saudi Kingdom has the ability to put 5 million extra barrels of oil a day onto the market and will likely do so if the price of crude oil gets too high.
For the past six months, Saudi Arabia has been the top supplier of crude oil to China, the second largest consumer of crude oil. In February, China imported 3.98 million metric tons, or 1.04 million barrels per day, from Saudi Arabia, a 9.8% year-over-year increase but 5.7% less than in January, according to the Chinese General Administration of Customs.
The Chinese government is not happy with current prices, notes Hunt. “The Saudis don’t want to shoot their customers in the foot,” he says. “They can put a cap on these prices any time.”
At the same time, though, crude oil prices are likely to remain supported by the bull run in commodities, in general, and as long as coalition forces continue air strikes against Libya, where crude oil production has fallen by about 1 million barrels per day.
Most commodity prices have reached levels reminiscent of 2008, when crude oil surged from about $95/barrel to $147/barrel in a few months. Much of that increase was due to speculative money looking for prices to hit $200/barrel. Today commodity funds are anticipating further price run-ups in oil, but so far the market has not rewarded them as generously as it did in 2008. Several months after the 2008 peak, oil prices plunged to $40/barrel.
“The market doesn’t have the craziness it did in 2008,” says Hunt. And even if crude oil and heating oil prices were to soar to new record highs, increasing input costs for producers, the net outcome for corn growers would be positive, says Hunt. Brazil would put more sugarcane into ethanol, forcing China to use its corn to make high fructose corn syrup, increasing demand for U.S. corn, he says.
However, if oil prices get too high, they will begin to curtail economic growth in world economies, which would in turn decrease demand for oil and other products.


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