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Monday, June 04, 2007

Potential Reasons Why Oil Prices Are Heading Higher Today

A Dow Jones Marketwatch reporter asked me today why I think oil prices are heading higher. My reasons:

#1) We had a report from the Energy Department measuring total implied fuel demand in the U.S. at an average 20.9 million barrels in the four weeks ended May 25. That’s up 2.4% from the same period a year earlier, and with refinery capacity so tight, there is no room for error. Higher fuel demand is pulling everything higher.

#2) More trouble in Nigeria – this time a proposed general strike in the oil and gas industry. I don’t know why this surprises anybody anymore, or more to the point, I’m surprised that oil prices go down when Nigeria doesn’t have trouble, because there is always trouble around the corner in that blighted country.

#3) By June 1, we experienced our second name storm of the 2007 hurricane season. Sure, sea surface temperatures are cooler than at the same time during the hellish 2005 season – the experts tell us that should mean fewer (or at least less strong) storms. But two named storms by June 1? Holy smokes, that is a strong argument for a very busy season indeed, maybe for reasons that aren’t factored in the models yet. I think traders are starting to price in the potential for a real blow-down season.

By the way, as an aside, did you know that Tropical Cyclone Gono (“Why not?” “I Gono”) has strengthened into a Category 4 storm in the Arabian Sea south of Pakistan and is forecast to head for Oman? That’s an important locale for tanker shipping routes.

It could be a combination of all or some or none of these reasons. Happy trading.

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