Why Is Oil Up Today?

A plethora of bad news hits the oil market, but the market continues to ignore it.

1) The Energy Information Administration (EIA) releases its July 2008 Short Term Energy Outlook showing that OPEC production will hit 32.7 million barrels per day when the Saudis follow through on its promise to increase production to 9.7 million barrels per day. More supply and less demand over the last six months should not lead to a 50% increase in oil prices.

2) It would seem that not all oil in the world is hard to find after all. The Wall Street Journal reports that oil still seeps to the surface in Kurdistan. The WSJ writes:

"Iraq is well known as one of the planet's last great oil repositories, with more than 115 billion barrels of reserves, by most estimates. The surprise is how much oil -- and easily accessible oil -- there appears to be in Iraq's Kurdish region, a rugged, Switzerland-size area that has seen centuries of conflict but essentially no oil exploration, until now."

3) The Wall Street Journal also reported that Asia, the engine of global demand growth, is starting to slow its consumption as subsidies are removed. The WSJ writes:

"People in some Asian countries are reining in their oil consumption as prices climb and governments unwind subsidies, offering early signs of a shift after years of rapid growth in demand. Asia has been the world's biggest source of new oil demand, with China alone accounting for half the world's increase this year. Government subsidies have kept retail prices in the region artificially low, encouraging consumption."

4) Oil production in China surprised to the upside in the first half of 2008 according to FIG Research.

"The country’s crude output for June hit 15.92 million tonnes which is a 1.3% jump compared with last year. Upgrading of fields in the west has enabled China to offset depletion of crude production in mature fields in the east."

"Growth in crude production paled in comparison to the advances made by the country’s natural gas output. During the first half of the year, China’s natural gas production leapt 17.3% to 43 billion cubic metres compared with a year ago. In June, the country produced 7.8 billion cubic metres of natural gas, up by 14.5% versus a year ago."

Instead the market remains fixated on a mythical Israeli attack on Iran. Does the market feel that the Israeli air force will miss the Nuclear facilities and hit the oil infrastructure instead? Or does it fear that the United States will be unable to defend our allies oil facilities and/or prevent Iran from closing the Strait of Hormuz?

Neither scenario is likely except in the fertile minds of traders looking for another reason to keep the gravy train rolling along. While the Strait looks tiny on a map, it is 21 miles wide at its narrowest point. This is roughly the distance between the New York Mercantile Exchange in Lower Manhattan and Great Neck, N.Y., a tony suburb on Long Island where many oil traders no doubt live.

Another mitigating factor is that our fleet would only have to defend a "two-mile wide channels for inbound and outbound tanker traffic, as well as a two-mile wide buffer zone," according to the EIA. I would be disappointed as a taxpayer if our Navy couldn't handle this job.

We also have a Strategic Petroleum Reserve (SPR) that we have built up to cover the disruption of any oil supply. If we take two million barrels a day out of the SPR it would last almost two years. Any supply disruption should last only for a short time.