Oil hits new high of $78 per barrel -- Expect more volatility

July 26, 2006

Oil hit a new record, at $78.40 per barrel (U.S. light crude) on July 21 due to the Israeli-Hezbollah conflict, some refinery shutdowns, and the threat to the Gulf region from this year’s tropical storms.

Saudi Arabia’s Foreign Minister, Saud Al-Faisal, traveled this week to meet with President Bush, Prime Minister Tony Blair, President Vladimir Putin and President Hu Jintao to ask for their support for an immediate cease-fire in Lebanon. This is in advance of the 18-nation meeting in Rome to resolve the conflict. Saudi Arabia also donated $1 billion towards the reconstruction of Lebanon, and $500 million towards the operation of the Palestinian government.

OPEC producers are convinced that current high oil prices are caused, not by supply and demand, but by speculation which is itself driven by escalating instability in the Middle East. Their market projections show that there is currently plenty of supply to meet demand and that they have a space capacity of 2 million barrels per day. Furthermore, they are projecting that the demand for oil will moderate in 2007, due to a decline in world GDP growth from 4.7% to 4.2% next year.

What It Means:
OPEC is concerned that high oil prices will encourage competitors to develop new fields. At some point, speculation could reverse the trend, and oil prices could dramatically drop, thus lowering the value of their proven reserves. Their biggest desire, therefore, is stability in oil prices, which requires stability in the Middle East.

Action Steps:
Expect continued volatility in oil prices, but an overall continued trend towards higher prices during our lifetimes. For retirement planning, continue to invest in oil producing companies and mutual funds, and rebalance your asset allocation regularly.

Source: “Rising supply and easing demand growth to moderate prices in 2007 -- OPEC Monthly Oil Market Report”, July 17, 2006; Saudi Press Agency web site; President of Russia Official Web Portal.