It would be great if I’m wrong but chances are we’ll see prices for crude hit $140 before we see $80 barrels again….After hovering around $103 a barrel for the past week, light, sweet crude had jumped to over $107 a barrel on the Nymex (and Brent over $117 a barrel).  Let’s take a step back and try to understand why this is happening……

The situation in Libya is looking like a shit-show. Pro-Gadhafi forces have pushed back rebel forces, in spite of the coalition-imposed no-fly zone.  Plus the reports of British Ops & the CIA tearing it up in Libya, doesn’t make matters any better.  And let’s not forget about the geopolitical unrest in Syria, Yemen and Bahrain.

The situation in Libya raises a broader, far more concerning set of questions. If it can happen in Libya, why not in Saudi Arabia, where the government is still essentially tribal in nature and will not be winning any prizes for their human rights record anytime soon. Women are still not allowed to drive. Take their 12 million barrels/day off the market, even for a few days, and the geopolitical implications are large, very large (despite the fact that the US imports only 2 million barrels a day from the mid east).Having said that, Canada is now our largest foreign supplier, followed by Mexico and Venezuela (I’ll save my opinions on Chavez for a later date). But oil is a globally traded commodity, and if you prick the supply line in one place we all have to pay. Remove Saudi Arabia from the picture, and the results could be catastrophic, for China first, but for ourselves as well.

While unlikely, if the US keeps demand relatively flat through the use of new alternatives (which there are a great deal of), new conservation efforts and a growing economy, China promises to eat up all of this increase. That my friends, is when the sushi hits the fan. I think oil could easily hit $300/barrel by 2020.

The situation in Japan has also been playing a significant role in the recent volatility and direction of the oil markets.  When the tsunami first hit, Japan’s economy came to a screeching halt. Airports shut down, roads impossible to drive on, etc… Japan’s demand for oil plummeted which brought the price’s down despite the turmoil in Egypt (which all else equal, would have brought the price of oil up). With global oil supply becoming more constrained as the chaos in the Mid-East continues to spread like STD’s on spring break, there are concerns that demand will drastically pick up from Japan, (especially if they try and substitute the power the nuclear plants were generating with oil, as opposed to natural gas or LNG). Prior to the travesty, Japan relied on imported oil for only 40% of its energy needs. That number is sure to increase…by how much? Well that depends on how Japan will substitute the power produced from their nuclear plants.

The US dollar has seen better days, better weeks, better years…. All things being the same, a weaker dollar means you need more greenbacks to buy the same amount of things, in this case crude oil. With the price of oil denominated in US dollars, and the US Dollar relatively cheap, countries, banks, speculators and hedgers abroad take advantage of this.  Inflation readings, much higher than-expected in the euro-zone has solidified expectations that the ECB will bump up rates next week, most likely giving the euro a jolt against the dollar. Just take a look at the European bond markets, with 2yr bonds yielding some serious numbers (10% in Ireland, 8% in Portugal)

Click the image to see the big picture of oil consumption around the world…1) A brief yet thorough history lesson on Black Gold…

It has been a long wait for “peak oilers,” whose passionate belief is that the world will run out of oil in coming years, sending prices through the roof. These beliefs came into fruition in 1956 when M. King Hubbert produced some simple supply/demand charts showing that US reserves of Texas tea would dry up by 1965-70, forcing a profound reliance on. This was later expanded globally, implying that Western civilization would come to a grinding halt.

For those around in 1973, you’re well aware OPEC raised prices from $3/barrel to $12 in the wake of the Yom Kippur war. And the resulting boycott caused enormous lines at  American gas stations.

Six years later, (1979) the fall of the Shah of Iran, took the price of crude oil from $12 to $40. Then Saudi overproduction kicked in big time, with no regard for OPEC, causing twenty years of falling prices….all the way down to $8/barrel. At the 1998 low, oil was selling for less than the barrel that contained it (a fact that is very hard to believe).

Then the developed world was taken back by China and the commodities boom, which abruptly sent the price of all hard assets soaring. Virtually overnight, the Middle Kingdom became the world’s largest marginal consumer of not only oil, but all energy sources. By 2008, peak oilers had the second coming in sight, with prices soaring to $150/barrel.

Now the Middle East is exploding. It took cell phones, the Internet, and let’s not forget about social media, to ignite a fuse that has been making its way through the mid east. At first, the world didn’t care, as Egypt and Tunisia produce little oil, and are non-factors in the global economy. Now the world does care, and the sushi might be hitting the fan some time soon. Let’s hope oil doesn’t break this $108 ressistance, it’s going to be an interesting close on the NYMEX this afternoon…