Oil Hits $140: What is Behind the Move and What Could Cause a Reverse

hy in the world would oil prices rise if Saudi Arabia boosts oil production? Logically, one would assume that more supply would equal lower prices, but in the case of oil, Saudi Arabia’s announcement was just not enough. So far, Saudi Arabia has announced plans to increase production by 200,000 barrels a day in July, which is less than their production increase last month. If oil prices managed to hit a new high after the last increase, it is not surprising to see prices fail to react to the smaller boost in production. Although Saudi Arabia could increase production even further following the OPEC meeting in Jeddah this weekend, for the time being, the market doesn’t care.

What is Driving the Latest Oil Spike?

Unfortunately there isn’t one concrete reason to explain the latest rise in oil. Instead, it is a variety of reasons that have added to the upside pressure in the commodity. This includes:

1) US Dollar Weakness Stemming from Manufacturing Data and Disappointment at G8

2) Sanctions on Iran

3) North Sea Platform Fire

4) Option Expiration

What Could Trigger a Reversal in Oil?

There are 4 things that can reverse the trend in oil prices and ideally 2 out of the following 4 should happen at the same time to trigger a meaningful turn in oil prices:

1) Other OPEC nations follow with production increases

2) US Dollar needs to rise and rise quickly

3) Congress needs to clamp down on oil speculators

4) US releases strategic oil reserves.

Even though other OPEC nations may follow in Saudi Arabia’s footsteps to announce an increase in production, their spare capacity is limited. The only hope is for the US dollar to rise and rise quickly which is why the Bush Administration is no longer just paying lip service to the strong dollar policy. Instead they taking serious interest in making sure that the currency stops falling because they know that it is one of the few ways to stop oil prices from rising. As for congress clamping down on oil speculators or the US releasing strategic oil reserves, those are a long shot, but if they do happen will result in a sharp and lasting reversal in oil. Otherwise there aren’t many other ways to prevent oil from rising to $200 a barrel.

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