Crude oil: the fat lady is backstage and about to perform

OILINTEL New York, NY - The demand for gasoline is about to get weaker. Countries that subsidize gasoline prices, so that their consumers are not exposed to the spiraling costs, are starting to cave under the financial pressure.
This was a very predictable consequence and it was just a matter of time before many governments react.

As we have written again and again, what happens in the U.S. inevitably spreads across the globe. In addition, Europe and Asia are not immune to rising oil prices.

In Asia, rising oil prices have become ominous. With many counties absorbing the costs associated with runaway oil prices, economies across the region are suffering.

Malaysia, for example, is raising retail gasoline prices by 40% because it can no longer afford to absorb the increasing costs. That means consumers in Malaysia will pay the equivalent of $3.30 per gallon, from about $2.31 per gallon currently. All but the absolutely necessary gasoline consumption will dry up. Economists estimate that the increase could raise inflation by 5% in Malaysia almost overnight.

Indonesia raised fuel prices last week by 28.7% or the equivalent of $0.65 per liter, or $2.46 per gallon. With millions of Indonesians living on $2.00 per day, it's clearly a decision that the government in Jakarta takes seriously, understanding the social impact. It is also clear that hundreds of thousands of Indonesians will no longer be able to drive and consume gasoline.

In India, state-owned oil companies are losing more than $100 billion per year because gasoline is sold to every citizen about $2.00 per gallon under the average market price in the world. It is breaking the government's budgets and they announced this week that gasoline prices will be increased by 10%. It was not an unexpected move, but diesel also was raised by 9.5%, after most had expected just a 5% increase. India is often grouped with China as the developing world's engines of growth, however, an increase of this magnitude could cut consumption by 25%, according to some analysts.

In China however, the situation is a little different, largely due to the upcoming Bejing Olympics. The Chinese government, already reeling from the recent earthquake and bad publicity regarding its reaction to group of mothers protesting badly designed and constructed schools that cost the lives of thousands of students, cannot afford a major public disruption if they raised gasoline prices. Yet.

However, Sinopec, China's main refiner, loses an estimated $430 on each ton of product it sells, according to published reports. And that's after they received a reported $1 billion compensation from the government last month, which was more compensation than it received in all of 2007.

Get the Olympics out of the way and let the dust settle, after that anything can happen.

I always find it interesting how OPEC manipulates markets. In times of weakening prices, OPEC members come out in public and make all kinds of statements regarding prices, supplies and demand. Most of it is utter nonsense, simply designed to boost prices so they don't have to actually do anything about surpluses in the market.

However, with all the protests and even riots around the world due to rising fuel prices, OPEC has been conspicuously absent from the world stage. Content to sit back and collect revenues on a monthly basis that exceed semi-annual revenues from just a few years ago, even though crude oil is overflowing, there is no reason for OPEC rhetoric right now.

However, just wait until prices slide below $120 per barrel, on the way to perhaps $100 per barrel. The hawks will be first to react, including Venezuela, Iran and Algeria, and maybe even Nigeria. They will start beating the drum of how supplies will tighten because they will reduce output.

Given that these producers are well aware of how sensitive markets are to hype and threats, they assume it will be enough to slow down a sell-off. I think they are wrong this time. I think that the CFTC probe caught even OPEC off guard. They have had a great thing going as they observed Goldman Sachs and others making predictions that built the cartel's wealth, even if there is very little basis in fact with respect to the projections. Who needs facts? OPEC has always operated under the assumption that anything they say is a fact to the market, even though they know that it is pure fabrication.

The fact is OPEC never lives up to output cuts, unless of course it's just Saudi Arabia that's doing the cutting. Most of the OPEC members assume if Saudi Arabia cuts production, they don't have to live up to their obligations.

But the rhetoric will come. It's a guarantee once the obscene revenues are threatened.

As we noted recently, June 1 was the official start to the hurricane season, and it began with the first named storm (Arthur), little more than a Caribbean tropical disturbance that never threatened Gulf production, either Mexican or U.S., but it served as a reminder that this is the season to escalate gasoline prices. The escalation in gasoline, also know as the "spring hype" is about two months late as high U.S. inventories kept the hype to a minimum. Diesel has been the "talk of the market," and of course the Goldman rallies in crude oil kept gasoline in the background. Certainly prices have risen along with the other market components, but gasoline usually leads the market at this time of year. That is of course until about mid-July when traders discover:

1. We have always had enough gasoline, and
2. Demand has not lived up to its potential

Now let the sky fall and all oil prices come down. The sooner I can blast Goldman Sachs for its inaccurate and immoral projections, the better.