A Critical Moment For Stocks: OPEC's Rift

Putin Hints At Restarting Oil Talks With U.S.

One of our 2004 predictions, penned on 12-30-03, read: "Russia's Putin will attempt to move closer to Bush and the U.S. oil industry after his re-election in March".

And that process seems to have started. U.S. Energy Secretary Abraham will be traveling to Moscow in order to discuss a resumption of the talks that between the two countries that were stalled as a result of the Khodorkovsky-Yukos saga.

According to the Wall Street Journal, on 5-26: "Mr. Putin (in his State of the Union Address) gave a boost to a proposed line from western Siberia to the Barents Sea near Murmansk in Russia's northwest, a route that would make tanker shipments to the U.S. cost-effective. Despite backing from a number of major Russian oil companies and the U.S. government, the plan seemed to have lost momentum inside the Russian government before Wednesday's speech."

The U.S. was predictably interested. "If [Putin is] saying that it's time to make a decision, that's good to hear because the decisions generally have been moving pretty slowly," said a U.S. diplomat, according to the Journal.

To be sure, it isn't a deal until the gasoline is filling U.S. tanks. We've seen it before. And the politics inside the Kremlin, including the numerous factions, and the old Communist guard, are certain to muck up the works.

But it is encouraging to see that not only was our prediction correct, but that Putin is back in business mode.

Saudi Arabia Ready To Increase Production

According to Dow Jones Newswires: "Saudi Arabian Oil Co. President and Chief Executive Abdallah S. Jum'ah confirmed that the Saudi state oil company is considering boosting production capacity earlier than it had first planned in response to sharply higher prices. The head of the world's largest oil-exporting company said it would increase capacity if demand remains high, but he didn't give a specific time frame for doing so."

The report added that "oil prices could fall if Saudi Arabia delivers on its pledge of more crude, the U.S. Energy Information Administration said yesterday. In its weekly commentary on oil markets, the EIA said an increase of a few percentage points fed by extra crude would raise gasoline output considerably, helping to bring down gasoline prices."

OPEC Throws In The Towel

OPEC is signaling a new price range for the price of crude oil.

According to Bloomberg: "OPEC ministers said oil prices above $30 a barrel may be here to stay, four years after agreeing that $25 a barrel is acceptable for both producers and consumers. Members including Iran, Nigeria and Venezuela said they want prices at the top end or above the official Organization of Petroleum Exporting Countries target of $22 to $28. The Saudi oil minister, Ali Al Naimi, yesterday said crude at $30 to $34 in New York reflects the costs of investing and maintaining oil fields."

We find it interesting that the cartel would speak so candidly, since we've been running this line in our energy section for about two weeks now: "The bottom line remains that an important change in psychology is taking place. Even if oil prices drop to $30 a barrel, the economists will cheer the move. But in fact, even $30 a barrel is expensive by historical standards."

The announcement suggests that OPEC is not going to increase production when it meets on June 3rd, and that it is aware of the fact that prices can start to drop from current levels at any time. But it also says that OPEC will likely cut back production if it thinks that the price of oil is in danger of breaking below the $30-$34 range.


It is becoming obvious that there is now a widening rift in OPEC, at least on paper. On one side, Saudi Arabia, whose government in under siege from Al-Qaeda and cooperating with the U.S. in the war on terrorism, has at least on paper decided that it will do what it can to attempt to bring oil prices down, while the rest of the cartel, except Iran, and Kuwait, remotely, are not willing or unable to increase production further.

Whether this is a rift that will widen, and will eventually split and lead to the demise of OPEC remains to be seen. But, the situation is becoming increasingly interesting.

At the same time, the U.S. looks ready to restart its attempts at bringing Russian oil to America.

Supply Data Leads To Market Stalemate

Mixed reports from the U.S. Department of Energy and the API led the oil market to a standstill. The DOE reported draw downs in both gasoline and crude stocks, as well as the important economically sensitive distillates, a bellwether for heating oil in the winter. The API reported slight builds. The net effect was mostly a stalemate, that will likely lead traders to keep oil in the recent $40 $42 per barrel trading range.

Crude oil prices were slipping on 5-27, but were still above $40 per barrel.

We've noted before that there are credible reports noting that OPEC's production capacity, outside of the Saudis is just about maxed out anyway. Thus, any talk of higher production, outside of the Saudis, may be just that, all talk.

Oil stocks, hold the key. A rally in oil and oil service stocks stalled out on 5-26.

The Philadelphia Oil Service Index (OSX) rallied on 5-25, closing above the 100 area, but reversed course on 5-26 ending below its 50 day moving average and the 100 area. A break below 94.75 could send it plummeting to the 88 area in a hurry. 110 is key resistance. The index did successfully test its 200 day moving average, but is still clearly diverging from the price of crude and predicting some kind of pull back in the market. For more details on trading the energy sector visit our energy timing page, featuring our highly effective OIH timing model and our Top Ten Energy Stock List.

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