Today, the price of oil hit a record high of $119.90 on New York. The usual culprits are at play. The US dollar closed at a record low against the Euro. There are supply disruptions in Nigeria. It seems that each trading brings a new high for the price of oil. Given the rapid ascent of petroleum, when will we see relieve at the pumps? The unfortunate answer is not anytime soon. Even with weaker demand from the U.S. and the fact that we are in the shoulder season, oil prices did not come down.
The slack in US demand is being absorbed by the developing countries. Thanks to robust economies in Asia, the Middle East and South America, oil demand has been steadily going up. Production is barely keeping up with demand. With most of the recoverable oil held by government state oil companies, production is not going up as projected.
Many of these oil companies lack the funds and know how to extract more oil. Money are being siphoned off to finance government programs or by corrupt officials. This explains why oil production in oil rich nations such as Nigeria and Russia actually dropped. With there very high royalty formulas, it’s simply not worth risking billions of dollars to ramp up production for the private oil companies.
Don’t be surprised to see oil going to $150 or even $180 very soon. Some of the best oil plays are in companies involved in the Canadian oil sands. Reserves are proven and is located in a politically stable country. Buy them on dips.