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Bursting Bubbles

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Bursting Bubbles

Everyone has heard the term bubble used to explain the current high prices in oil. Everyone is either hoping it will burst or worried it will burst. During the opening ceremonies at the EU World Petroleum Congress this week there were plenty of oil and energy people in attendance and almost all agreed the bubble is about to burst. Unfortunately they are referring to the bubble of hope that oil prices will return to "normal" levels of just a couple years ago.

The outlook from the meeting was grim. British Petrol (BP) CEO Tony Hayward warned against holding on to hope the current price bubble will burst like it did in the 1970s. "The era of cheap energy is probably over at least for the medium term," he said. 

He said, "The last time prices surged to these relative levels there was new production coming from the North Sea and Alaska that helped bring prices down, but now there are no new sources of easy oil to compensate. Instead OPEC production fell 350,000 bpd last year. Even Russia has started to decline."

Shell CEO Jeroen van der Veer agreed with Hayward and acknowledged it was time to focus on more difficult oil. That is oil that requires unconventional methods of recovery that are slow, costly and more complicated than the normal drilling process. He said, "There is hardly any additional access to easy oil," and "Most of the new supplies will be difficult oil."

There are more than 3,000 registered participants at the Madrid conference including OPEC oil ministers.

Crude soared to a new high on Monday at $143.67 before pulling back to $140 at the close. Overnight Monday night it has risen back to $141.50 and climbing. With so many people convinced it will continue to move higher and lingering concerns over Iran it has become almost a self-fulfilling prophecy.

There was more rhetoric out of Iran saying they would bombard Israel is missiles and exert control over the Straits of Hormuz. They want to make sure they get that point across about Hormuz in hope cooler heads will keep Israel and the U.S. from attacking on fears of an oil shortage. I would not hold my breath. Iran needs the money from oil more than any Persian Gulf nation and they would not blockade the Strait simply because they would be cutting off their own source of funds.

It will be interesting to watch trading in crude the rest of the week. Will they bid it up ahead of the 3-day holiday weekend or sell it off? With the recent intraday volatility of $3-$5 a day it is tough to tell if another trend will appear. We are currently trading just over the three week plateau around $135 and some feel the end of quarter spike we saw on Monday could have been the last gasp. Obviously many many traders have thought that on every new high spike since $90 and been wrong.

Jim Brown

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