Tuesday, January 25, 2011

Oil reacts to UK contraction and OPEC production.



The UK Contracts and Oil Reacts

Maybe, just maybe there are still risks in this global economy of ours. Oil prices took a drop and the pound got pounded on news that the UK gross domestic product fell 0.5% in the three months through December. The number failed to meet expectations of 0.5 increase and shows that the UK economy may be sputtering.

If that was not enough to shake the oil bull's confidence, there are worries creeping up in Spain's bond market. A plan put through by their finance minster does not seem to be convincing investors that Spain can get a handle on their financial situation. Every time an issue of confidence has been raised in Europe oil prices have got hammered.

The IMF also failed to inspire confidence. Oh sure, they raised forecasts for global growth to 4.4%, mainly based on the extension of the Bush tax cuts. Still, they warn that the growth is not going to make a big dent in the employment picture and those global risks still exist. Do you think?

Now which is it? Is more OPEC oil bullish or bearish? Oil demand has been rising and there has been increasing pressure on the OPEC cartel to increase production. Words from Ali Naimi seem to suggest that they will indeed rise to the occasion so you might think that is bearish.

Well not in Goldman Sachs world. On the same day the Saudi oil minister broke the market it seems that Goldman sees an increase in OPEC production as wildly bullish. Why? Well, if OPEC raises production, they will have less spare capacity.

So let's get this straight, if OPEC does not raise production like the International Energy Agency are urging them to do then they say prices will go up. If they do raise production Goldman warns that the draw on spare capacity will cause oil to enter a structural bull market.

What's a poor cartel to do? Not to worry because the Goldman bulls do offer OPEC some advice. They say that it is still too early for OPEC to raise production because oil inventories remain above their five-year average. Just keep production steady so you don't use your spare capacity.

Or should they pump more oil to meet growing demand? Why don't we just say that if global demand rises by 6 million barrels a day, then OPEC will be out of spare capacity. Oil prices are hitting a seven-week low. Did you get caught up in all the bullish hype?!

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487

begin_of_the_skype_highlighting (800) 935-6487
end_of_the_skype_highlighting or at pflynn@pfgbest.com.

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