Oil Prices

Looking at the the technicals alone, the chart has alerted that the next high level price will hit is 140.40. If 140.40 is breached by even a penny the price will go on to 147.29. Prices will most likely continue to climb for the rest of the summer, but at some point prices will crash very hard; the bubble will burst just like the housing market has already done. Investors have poured all their dollars into oil and other commodities, to hedge against inflation and the falling dollar. This is a good idea on makes sense for investors to do, but this idea has turned into hysteria and a massive bubble has been created. If these high prices stick around, it will destroy big oil. The big SUV market has all but collapsed, and people are focusing on smaller cars.GM has already closed 4 plants. This changes demand on a fundamental level. When you combine this with all the global warming hype, it spells trouble for oil in the long term. 'Global warming' is not going away, real or not. Governments are putting lids on carbon emissions; all very bad for oil. With the housing market, all the big money went into high risk mortgages. What happened? The bubble burst and the commodity prices (houses basically) took a hard fall that will take years to recover from. This is the future for oil and it's fall will effect the whole world economy just like the housing crisis. Housing will come back because the demand for houses hasn't really changed. We all still need a place to live, just like before the crisis. When oil falls though, all of us will have smaller gas tanks (if we aren't driving an electric car) and the fundamentals will have changed drastically. China and India will run into the same problem eventually. Oil is dying and we are witnessing the biggest paradigm shift of all time. If I had money to hedge, I'd put it into new energy. Pretty soon a day will come when mega fortunes will be made and lost overnight. Where is your money?

There is no question that billions of dollars of buying power in the form of new investors , ETFs and Hedge Funds have some effect on price. However, there is no hedge fund forcing Exxon and Chevron from doing more to replace their reserves - which they have not been doing. In fact The International Energy Agency is set to revise its supply projections - that is , to lower their supply forecasts . according, to a recent report in The Globe and Mail . It had previously stated 100 million barrel a day demand by 2030 would be met by expanded production - by that time . " .. the agency is now worried that aging oil fields and diminished investment that companies could struggle to meet ( expected demand in the future ) "

Exacerbating the high oil prices are production problems in Russia, the world’s second largest oil exporter. Aging oil fields and a lack of infrastructure investment has led to the country’s first annual production decline in 10 years. Output fell 0.9% to 9.76 million barrels a day in the first five months 2008, Bloomberg reported. "Growth last quarter fell on a year-on-year basis, and this has to do with the policies implemented over the prior year to raise taxes on oil industries," Deutsche Bank’s Sieminski said, speaking of Russia’s oil difficulties. "This made it difficult for foreign capital to come in." But "if Russia could reverse some of these policies and get their own oil industry back on, this will help very much" with supply concerns, he added.

"We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves," he said. "Throw in a few [surprises]… perhaps a terrorist event… and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices."

Worldwide increases in demand are being driven by developing economies, especially India and China. They are not so closely linked to the US, and a slowdown in the US will not affect their growth very much. Thus, demand will continue to increase even if there is a credit crunch and slowdown in the US. Supply is waning in traditional fields and major swing producers such as Saudi Arabia will not be able to fill demand spikes caused field problems elsewhere. The costs of opening other fields are rising. Nonetheless, in the face of rising demand the value of the product will continue to outpace increasing exploration, extraction and transportation costs.

Mexican Production Declining

Mexico provides about 14% of the oil the US imports. On any given day that makes it either the #2 or #3 leading source for US oil imports after Canada and Saudi Arabia. Given that the US currently imports close to 70% of its oil needs, the Mexican oil is critical. But here's the thing. Using straightforward ELM calculations, Jeffrey Brown is confident that Mexico will ship its last barrel of oil to the United States -- or anywhere else, for that matter -- about 6 years from now, in 2014. In a recent interview with Brown, I asked about this forecast. "Mexico was consuming half of their production at peak in 2004. And if you look at the '05, '06, '07 data, they're basically on track, on average, to approach zero net oil exports no later than 2014," he confirmed. Of course, the US is completely unprepared to replace this ""source of oil, especially considering the growing stresses on global oil supplies causing by ballooning demand from emerging markets. That means the international competition for available supplies is only going to get more desperate in the months and years ahead. What will this mean to oil prices, according to Brown? "From this point out I think we'll see a geometric progression in prices ... you know, $50, $100, $200, $400, whatever. The only question now is how short the periods will be between prices doubling again." Coincidentally, while this report was in preparation, on April 30, 2008, PEMEX, Mexico's national oil company, announced it would be unable to fulfill this year's scheduled oil export obligations to the United States ... falling short by about 11%, or 184,000 barrels a day.

Indonesia Can no longer Export Oil

Indonesia is leaving the Organization of Petroleum Exporting Countries because declining production and investment have made it difficult to meet even its own needs, the energy minister said Wednesday. Purnomo Yusgiantoro told reporters it no longer made sense for Indonesia, the only Southeast Asian member of OPEC, to stay in the cartel. “Even though we are sometimes a net importer and sometimes a net exporter, we are a consuming country,” he said. “Indonesia is pulling out of OPEC.” Indonesia is the region's largest oil producer, but the nation of 235 million people has had to import for years because of aging wells and disappointing exploration efforts. A weak legal system and red tape has scared foreign investors away, even as domestic consumption rises. Mr. Purnomo said the decision to leave OPEC was made by the cabinet of President Susilo Bambang Yudhoyono, which is being forced to slash fuel subsidies due to soaring global prices. In the last few days, consumers have seen prices at the pump jump by around 30 per cent. Mea Culpa “We are not happy with the high oil price,” he said.

Many Big Oil companies still have solid fundamentals. One of the main rules for investing during volatile times is to look for companies with strong fundamentals. This is especially true for an investor like me who isn't overly active and who likes the less-sexy "buy and hold" strategy. The idea is to look for companies with strong underlying value, and then buy more shares when the stock is pulling back a bit. That way when the market (and the company) recovers, you make more money since you were able to buy more shares.

And it's tempting to get into Big Oil right now. After all, what is more fundamentally sound than a company like Exxon Mobil (XOM) that has a proven business model and a penchant for making huge profits? Big Oil stocks have remained relatively stable (though they are down from last fall) throughout, and recent events seem to indicate that they will go up. (Well, maybe not BP -- BP, it's the one Big Oil company that I consider kind of shaky.) But for the environmentally friendly investor it's hard to justify investing in Big Oil. This is why STATOIL ASA (STO) offers such an interesting option. It is an oil company, but it is also trying to work toward carbon neutrality. And it appears to offer good valuation.

Worldwide oil production has not substantially increased, even as prices have risen sharply over the past few years. Current prices as of the end of 2007 ($90+) do not produce huge profits for producers as the cost of adding new production has also risen sharply. Demand has not been impacted severely by the rising prices. Hence the rises up until now are largely due to normal market balancing and not do to speculation or worries about political instability. Prices are therefore unlikely to fall much, and will increase as demands increases. The may spike if there are problems with supply.

The IEA report will be published in November 2008 and may rattle the market if those findings are accepted. they are studying the major oil fields and projects . this has been done by CIBC World Markets and Goldman Sachs and they have predicted prices as high as $200 by 2010.