Saudis say oil won't be used as a weapon to end Middle East crisis

Posted Jan 8th 2009 2:15PM by Joseph Lazzaro
Filed under: Commodities, Oil

The oil market breathed a minor sigh of relief Thursday after Saudi Arabia said there would be no replay of 1973-74 regarding the current Middle East crisis.

Saudi Foreign Minister Prince Saud al-Faisal said oil "isn't a weapon" to end the conflict between Hamas and Israel, Bloomberg News reported. Prince al-Faisal said oil can't reverse the conflict, countering a call by OPEC-hawk Iran that Arab states stop producing oil as a way to pressure countries supporting Israel.

Oil continued its recent downward trek Thursday morning on the news, falling $1.58 to $41.05 per barrel. Oil hit an all-time of $147.27 per barrel in the summer of 2008.

In 1973, the Arab members of OPEC implemented an oil embargo against the United States in response to the U.S.'s decision to re-supply Israel's military during the Yom Kippur War, which Israel won. The price of oil subsequently quintupled from about $20 per barrel to about $100 per barrel in 2009 dollars (or from about $3 per barrel to $13 per barrel in 1974 dollars), creating the world's first oil shock, and triggering a U.S. recession.

The other major energy commodities also declined early Thursday. Heating oil fell 2 cents to $1.54 per gallon, unleaded gasoline decreased 3 cents to $1.07 cents per gallon, and natural gas dipped 5 cents to $5.92 per million BTUs.

Israel counter-attacked Hamas after Hamas refused to stop launching rockets into Israeli towns from the Gaza Strip. Egypt-hosted talks aimed at attaining an enduring cease-fire between the two are expected to continue today in Cairo, The New York Times reported Thursday.

The conflict, along with Russia's natural gas dispute with Ukraine, are two short-term factors that have distorted energy prices to the upside, so says economist Richard Felson. Further, once the two geopolitical issues have been resolved, oil will resume its downward trek, he said.

"The oil market's fundamentals point to much lower oil prices ahead, without question. We have oil inventories building up in Cushing, Oklahoma [a NYMEX oil contract storage location], around the world, and even in supertanker ships which are being used for storage," Felson said. "The Middle East tension and Russia's latest powerplay have created energy market jitters, but they can't go on forever."

After the conflicts are resolved, Felson said he expects oil to test $30 per barrel later this quarter, on weak demand, due to the U.S. and global recessions.

Oil Analysis: Oil bulls and investors interested in energy plays that benefit from a higher oil / gasoline price take note: economic fundamentals suggest oil has not bottomed. Moreover, absent another production cut by OPEC, an increase in U.S. oil demand, or the start of World War III, it's hard to see oil sustaining rallies above $60 in 2009.

Tags: gasoline prices, Hamas, inthenews, inventories, Iran, Israel, natural gas, oil prices, oil shock, OPEC, Russia, Saudi Arabia, Ukraine

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Reader Comments (Page 1 of 1)

1-11-2009 @ 2:57PM

Bobby said...

There should be a floor & ceiling put on a commodity such as oil that's so critical to the inner workings of the industrial world.

Speculators would hate it of course but there is not another single product on the face of the earth at this time so critical in bringing every single product to market.

Pricing should be held in line so all nations involved make their returns based on international economic growth figures.

Oil can either kill or do great things for the world. The commodity markets have enough play toys to trade....