There is no doubt that in the long run oil prices are going to be more than $100/barrel. As much as we talk about reducing our dependence on foreign oil in the United States, it’s just not going to happen anytime soon. But in my opinion, the recent increase in prices is not fully justifiable.
The latest report from the IEA shows that Libyan exports of oil have dropped from 1.6 million barrels a day to 600 thousand barrels a day. This looks to be significant, but Saudi Arabia’s output is over 12 million barrels a day. In addition, Saudi Arabia agreed to increased output to ensure there is no shortage of oil.
Now that said, I understand why traders are factoring in a risk premium for oil right now. The political uncertainty in the Middle East is unnerving. If large protests in Saudi Arabia lead to political unrest in the country, we should all brace for oil to sky rocket. In fact, some protests have already occurred and Saudi Arabia has taken action by banning future protests. For this reason, I think we are going to see oil continue to rise in the near future.
I feel that oil will reach the $115 level in the coming weeks. Saudi Arabia is definitely the key to oil prices and I will be paying particular attention to see if any major protests occur. If the unrest doesn’t amount to any major unrest in Saudi Arabia, I think we will see a correction in oil back to the $85 to $90 level. I will revisit oil prices in my posts over the next few weeks. If oil reaches the $115 level, I will consider opening a position in PowerShares DB Crude Oil Dble Short ETN (DTO) to profit from the correction in prices.