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Volatility High as Crude Options Expire

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The options on the June crude futures contract expired today and the accompanying volatility was huge. Crude fell from a high of $126.64 in regular trading to a low of $120.76 at 1:PM. Almost immediately buyers returned to push the price back to $124.25 at the close and erasing much of that $6 drop.

The heightened volatility was due in part to the option expiration. The volatility is not over yet as the June crude futures themselves will expire next Monday. With the equity markets in rally mode we could see some traders long crude exit and move into equities. Many traders feel the recent $17 spike in oil over the last two weeks has been a climax spike and it is time for reality to return.

Consumers would b thrilled to see some relief at the pump. The national average for gasoline prices edged up to $3.776 on Thursday with diesel jumping 3.6 cents to a new record at $4.455 per gallon. With the Memorial Day holiday marking the beginning of the summer driving season many analysts are expecting $3.85 to $3.90 a gallon next week.

This week's inventory report showed a -1.7 million barrel drop in gasoline inventories but they are still 5.9% higher than this same time last year. Distillates like diesel, jet fuel and home heating oil are becoming a problem. Prices are still rising sharply with inventories -12.9% below last years level.

Refinery utilization spiked from 85% to 86.6% now that the maintenance cycle is over and all refiners are making summer blend fuels. Those utilization levels should continue to climb as the driving season picks up speed. The question is how much speed. With gasoline nearing $4 it is becoming really painful to stop for gas. We don't know how that is going to impact the summer driving season. With a tank of gas in the family SUV costing an average of $30 more per fill up that could mean summer vacations will be much closer to home.

In Saudi Arabia President Bush will meet on Friday with King Abdullah. Bush plans to ask again for Saudi to pump more oil to push prices lower. Last time he failed to get an agreement with the King. This time Bush has some problems at home he can use as a lever. Lawmakers are being pressured to do something even if it is wrong. One bill would freeze four highly sought-after arms deals including a #123 million shipment of sophisticated laser-guided smart bomb kits that would give Saudi planes pinpoint accuracy. Another bill would give U.S. prosecutors the authority to apply U.S. antitrust laws to oil-producing countries. These bills could have unintended consequences and put a strain on Saudi relations with America. Saudi is the only major OPEC country that is actually investing a major part of its revenue in exploration. They are the last country the U.S. should be attacking for not doing their part.

Another consequence could be the end of OPEC. If the U.S. went after OPEC on antitrust grounds then OPEC could easily just disband and that would leave 11 independent nations setting their own price for oil. Without quotas and under fire for price fixing they could simply choose to pump less and the price would rocket higher. OPEC may not be our friend but they really do have control over keeping production level. They will cease to exist as an entity soon enough once Peak Oil arrives so there is no reason to push them into desperate moves right now.

Jim Brown)

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