Former Malaysia premier Mahathir once urged the Islamic countries to control their own destiny and at the same time show the true color of Muslim’s power to the western countries, particularly United States. The silver bullet was of course the huge reserve of oil which coincidently happens to be stored under the bed of Islamic countries. But using oil as the weapon in trade war (and political pressure) against U.S. is easier said than done.

Previously, any actions by OPEC (Organization of the Petroleum Exporting Countries) will affect the global oil-price in one way or another. And the reason why U.S. established friendship with Saudi Arabia, the country with the largest oil reserve in the world, decades ago is no coincidence. U.S. needs a presence in the land of unknown, the Middle East, to at least monitor and chip in some influences on the policy of oil output back then.

Saudi Arabia, being the de-facto leader or “big brother” amongst the OPEC countries could easily influence the oil price by way of increasing or decreasing daily oil production, and still can at today’s standard but the level of difficulty had increased. Everyone thought the oil production would remains before the Sept. 11 OPEC meeting in Vienna but increase it did.

Everyone was surprised, what more it was only six months ago when calls were heard urging OPEC to increase production but was ignored – OPEC was satisfied with the $60 per barrel level. And now after the Sept 11 meeting OPEC decided to increase production of 500,000 barrels a day beginning 1st Nov 2007 to cool things off.

However the oil price continues to go up instead of coming down. On Sept. 12, U.S. light crude for October delivery briefly pushed above $80 a barrel ($80.18), before closing at a record high of $79.91 a barrel, up $1.68. There’re some factors which contributed to the bullishness of energy and the scary part is it might just cointinues to spike.

Oil Price to Soar – Contributing Factors

[ 1 ] Wednesday’s weekly report from the U.S. Energy Department’s Energy Information Administration said crude oil supplies fell 7.1 million barrels in the week ended Sept. 7, more than twice the average 2.7 million-barrel decline analysts surveyed by Dow Jones Newswires had expected.

[ 2 ] Speculative buying by big investment funds has created “backwardation” in the trading of oil futures, which means near-term futures prices are higher than at the back end several years away. For example the NYMEX front-month contract for October delivery is at about $79 per barrel, while prices for oil five years out are around $70 per barrel.

Such strategy has created a tight demand and speculators can make money by buying oil at the front end and then rolling over into cheaper oil as contracts expire (investors who buy now will end up with more oil contracts later).

[ 3 ] The OPEC Basket, which is composed of heavier, lower-quality crude oils, hit an all-time peak of $73.23 per barrel on July 19. Opec Basket usually trades at a substantial discount to the Western marker crudes.

[ 4 ] Low Supply but High Demand – Global crude oil production is over 1 million barrels per day lower than last year, while global demand is over 1 million barrels per day higher. It is estimated the demand is in the range of 1.5 million barrels per day in 2007 and 2008. According to Paris-based International Energy Agency (IEA) global oil demand is forecast to expand by 2.2% per year on average, led by Asia and the Middle East. Chinese oil demand will reach almost 10 million barrels a day in 2012, and China will only produce 3.9 million barrels domestically.

[ 5 ] Political uncertainties by oil producing countries – Venezuela, whose President’s aggresive move to wrest control of key oil projects from global companies has created some sor tof mess. Since President Hugo Chávez came to power in 1999, he fired 75% of the managers at state oil company Petróleos de Venezuela (PDVSA) after a strike in 2003, leaving PDVSA handicapped. Venezuela’s output has declined by about 25%, to 2.4 million barrels per day since. It was reported that life was so difficult that Exxon Mobil Corp.and ConocoPhillips walked off from Venezuela.

President Vladimir Putin’s energy policies have also contributed to the slowing growth in Russian output. Not only it forced BP and Royal Dutch Shell Plc into selling its stake in Kovykta and Sakhalin respectively, it’s now forcing ExxonMobil to do the same. The International Energy Agency says Russia’s production may top out at about 10.5 million bbl. daily – well below the expected peak output of 12 million bbl. per day.

[ 6 ] Hurricane season – which begins June 1 and ends November 30, has a 75% chance of being above normal in activity. NOAA scientists predict 13 to 17 named storms, with seven to 10 becoming hurricanes, of which three to five could become major hurricanes of Category 3 strength or higher. Hurricane Humberto was upgraded to a minimal hurricane early Thursday morning, and made landfall over rural Jefferson County, Texas. The storm continues to spread heavy rain and increasing winds along the upper Texas coast.

[ 7 ] Potential military attack on Iran – while President Bush might be loss in ideas, certain powerful positions in Washington are seriously considering and justifying a military attack on Iran, the second largest OPEC producer. Whether there’re enough justifications to launch an attack is beyond the debate. For the sake of political and business profit potential, something could be cooked up to justify it.

According to an analyst from Goldman Sachs, a bear market for oil is now $40 per barrel, not $10 as in the old days, while a bull market is $90. And since the bear marker already started from the end of last summer until the current shift in the price curve, it is expected the oil price is heading into the bull territory.

Oil-Stocks to Monitor

Some of the oil-related stocks to be focused include:

• EOG Resources, Inc. (NYSE: EOG, stock) – explores, develops, produces and markets natural gas and crude oil primarily in major producing basins in the United States of America (United States), Canada, offshore Trinidad, the United Kingdom North Sea and other international areas.
• Transocean Inc. (NYSE: RIG, stock) – primary business is to contract these drilling rigs, related equipment and work crews primarily on a day-rate basis to drill oil and gas wells – specializes in sectors of the offshore drilling business with a focus on deepwater and harsh environment drilling services.
• Schlumberger (NYSE: SLB, stock) – an oilfield services company, supplying technology, project management and information solutions.
• GlobalSantaFe Corporation (NYSE: GSF, stock) – an offshore oil and gas drilling contractor, owning or operating a fleet of 61 marine drilling rigs, charges on a daily rate basis.
• EnCana Corporation (NYSE: ECA, stock) – is a holder of natural gas and oil resource lands onshore North America.
• Halliburton Company (NYSE: HAL, stock) – an oilfield services company and a provider variety of services, products, maintenance, engineering and construction to energy, industrial and governmental customers.
• Valero Energy Corporation (NYSE : VLO, quote) – owns and operates 18 refineries located in the United States, Canada and Aruba that produce refined products, such as reformulated gasoline (RFG), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen).

On the local front, some of the companies to benefit either directly or indirectly from the bullishness of oil price include:

• Kencana Petroleum Bhd (KLSE: KENCANA, stock-code 5122),
• Scomi Engineering Berhad (KLSE: SCOMIEN, stock-code 7366),
• Wah Seong Corp Berhad (KLSE: WASEONG, stock-code 5142),
• Muhibbah Engineering Berhad (KLSE: MUHIBAH, stock-code 5703),
• Pantech Group Holdings Berhad (KLSE: PANTECH, stock-code 5125)

# TIP: If you decided to do option trading, remember to buy option with time-value of at least six months expiration.

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September 13th, 2007 by financetwitter

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