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Friday, February 01, 2008

With Friends Like OPEC ...

Despite the fact that oil recently surged to $100 and $90 seems to be the new floor for a barrel of crude, OPEC decided to keep oil production targets unchanged at its meeting in Vienna. Oil was originally unchanged on the news, but has pulled back now.

I don't think it will be down for long. The Organization of Petroleum Exporting Countries says it will consider CUTTING production at its next meeting. “If prices continue to fall as we've seen in Venezuela until now, then we'd probably be prepared to propose a cut at the next OPEC meeting in March,'' Venezuelan Oil Minister Rafael Ramirez told reporters in Vienna yesterday.

This tells me that SUV-driving Americans aren’t the only ones addicted to high-priced oil. You’d think that OPEC, which accounts for 40% of the world’s oil production, would be rolling in dough. And sure, the US Energy Dept. estimates that OPEC members earned $675 billion from oil exports in 2007, a 10% increase from the prior year. But OPEC is mad as heck because the 15% drop in the US dollar over the past year is denting their revenue stream.

Going forward, the Energy Information Administration estimates that OPEC could see $850 billion in net oil export revenue in 2008, a 26% increase from 2007.

You know what I think OPEC is thinking? What if the US dollar drops another 15%? The easiest way to make up for that is to cut production so oil prices RISE 15%. That would put oil at about $105 per barrel. After all – OPEC knows it can probably sell the oil it doesn’t sell today at a higher price tomorrow.

And if you like shopping in Europe – as many OPEC oil princes do – you might want to make sure you have some walking around money by cutting production enough that oil prices go up 30%. That puts the price of a barrel of crude at around $119.

But, but, some say breathlessly, that will cripple the global economy. Yeah, yeah, says OPEC members, as they roll their eyes. They’ve been hearing this same sad song as oil rose above $50 … $60 … $70. But the global economy keeps on trucking, and Americans keep driving Lincoln Navigators.

And the sad fact is, OPEC probably won’t have to cut production to see oil prices rise this year. Mexico expects production at its giant Cantarell field to drop another 16% (200,000 barrels per day) this year, after falling 16% last year. We are seeing supply disruptions from the frozen oil sands of Canada to the strife-torn backwaters of Nigeria and beyond. And millions of people in China and India are getting behind the wheel of gas-guzzling cars for the first time. They’ll use every barrel of oil that we don’t!

Meanwhile, ExxonMobil just reported the highest quarterly and annual profits EVER for a US company. Chevron just reported that 4th quarter profits rose 29%. This is a great time to be an oil company. And many of these stocks are priced as if oil is going back below $50 per barrel. Don’t hold your breath for that. I think there are many, many bargains in the energy sector. The kind I recommended in my
recent energy report.


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