Just consider it a drop in a bucket. Make that a drop in a barrel.

Traders Monday generally downplayed the downward price potential of Saudi Arabia's announcement that it will boost oil production by 3.3% to 9.45 million barrels per day, starting in June 2008.

The oil markets were relatively calm Monday, as traders shook-off the Saudi announcement, and oil closed up 86 cents to $127.15 per barrel, a record-high close. Oil hit an all-time high of $127.82 per barrel on Friday, May 16, 2008.

"The Saudi oil boost it just not large enough to be meaningful, and it's about two years too late," Jim Deitz, independent energy trader, told BloggingStocks Monday. "We need an increase in production on all fronts and demand destruction to take the heat off this market." Dietz added that he was presently flat, or had no open energy trading positions.


The other major energy commodities closed mixed Monday. Heating oil fell about 2 cents to $3.68 per gallon, unleaded gasoline gained about 1 cent to $3.23 per gallon, and natural gas declined 16 cents to $10.93 per million BTUs.

Demand destruction's dynamics

Demand destruction refers to the point at which individuals / businesses decrease consumption because the price of a good / service is too high. Demand destruction has already occurred in the U.S. gasoline market, due to a record-high average gasoline price over $3.78 per gallon. Dietz said now what's needed is demand destruction in oil / diesel in emerging market economies, particularly in the mega-growth nations of China and India, to convince producers that users have limits regarding how much money they expect to allocate for oil-based energy.

"If the market doesn't see that demand destruction, globally, oil's price will continue to rise. It's basic economics," Dietz said.

As an example of demand destruction, Dietz used the product coffee. "Say I sell coffee at $1.50 per cup. But I notice that each morning people are willing to pay $2 cup, same size and quality, so I raise the price," Dietz said. "People continue to buy. So I raise it to $2.50, and they still buy, then $3, same result. Until I see a reduction in purchases, I'll keep raising that cup of coffee price, until people will stop buying it. It's the same thing with oil. Until the market sees nations cutting back oil consumption, the price will continue to rise."