“Bullish news today on top of the recent Chinese stimulus package and news of Saudi Arabia’s supply cuts failed to overcome economic concerns,” said Sucden Research analyst Michael Davies.

Among that bullish news was a report that militants are threatening to renew attacks on oil facilities in Nigeria. A few months ago, that would have automatically shoved the oil market higher. No longer.

Oil prices will likely “keep skipping along bottom here at the $60 per barrel range until we see the fully-implemented OPEC cuts and some winter demand data hitting the market,” said Neal Ryan, of Ryan Oil & Gas Partners.

And Mexico has reportedly hedged almost all of next year’s oil exports at prices ranging from $70 to $100. That stood in stark contrast to last year, when the world’s sixth-largest producer hedged only 20-30% of exports.

“This is a clear sign that they fear oil prices will remain below $70 a barrel in 2009,” said Kathy Lien, of GFT Forex. Lien added that “we doubt that they are the only oil producing country to start hedging.”

Source: Crude closes below $60 -  Mexico hedging like crazy

Across the U.S., many people and households have run up debts just trying to maintain their lifestyles. And many consumers now find themselves so deep in the hole that they may never get out. Bankruptcy filings are soaring, especially within older demographic groups.

Most local and state governments are in a quandary, as are the feds. With energy costs rising, it is far more expensive to provide necessary services. It costs more to keep the police cars and ambulances running. School districts are strapped to pay for busing students. Some districts are discussing going to a four-day school week.

Even basic street paving has suffered, due to the rising price of asphalt. At the same time, many motorists have cut back on driving, so fuel tax revenues are down in most jurisdictions.

Major US Oil Supplier, Trouble Brewing in a Key Oil Patch …

Things have tightened up, right? But still, you ought to thank your lucky stars that you don’t live in one of the key oil-exporting states of this world. Because that place is descending into chaos, if not anarchy. And it could come back to bite us here in the U.S., much sooner than you expect.

When you think of violence and warfare in a major oil-producing nation, your mind probably focuses on, say, Iraq. And sure, things are dicey in Iraq. But for me, the most worrisome oil-producing area in the world is Nigeria.

Nigeria is the world’s eighth largest oil producing nation. Nigeria claims to have about 36 billion barrels of proved reserves. (That’s 50% more than the U.S.) Overall, the oil industry in Nigeria lifts about 2.5 million barrels per day from onshore and offshore oil fields. There is much more oil left to discover in Nigeria, too.

The U.S. relies on Nigeria for about 850,000 barrels of oil imports per day, or about 7% of total imports. But this may not last much longer. There are profound problems in Nigeria that could disrupt world oil trading patterns and directly affect the U.S. energy supply.

Nigeria’s Lost Riches…

Despite its sizeable oil bounty, most of Nigeria’s 140 million people live in abject poverty and utter third-world squalor. Most Nigerians live no better than millions of others in West Africa, which is the least developed region of the world’s poorest continent.

Oil prices have reached record highs in the past few years. And Nigerian government coffers are swollen to unprecedented levels. Yet the vast majority of Nigerians live worse than they did in years past, when oil prices were low.

There is a long history in Nigeria of squandered wealth and lost riches. Over the past 40 years, Nigeria has received the equivalent of nearly $1.2 trillion from oil production.

Payments of this magnitude have enabled other oil-producing states, like Qatar and the United Arab Emirates, to develop some of the strongest economies in the world. But Nigeria remains mired in backwardness. The country lives with a legacy of corruption.

The Lights Could Go Out Anytime…

One key measure of the progress of any nation is the availability of electricity. Do the lights work? Will they stay on when you flip the switch?

Lagos is the gigantic former capital city of Nigeria, home to more than 8 million people. But in the capital city of a nation enriched by oil wealth, the only way to obtain consistent electric power is through diesel generators.

According to a recent report, Nigeria has about 3,000 megawatts of installed electric capacity. But only about 1,000 megawatts of that are up and running on any given day. By comparison, South Africa has over 30,000 megawatts of installed capacity to serve a population of 42 million (less than one-third that of Nigeria).

Much of Nigeria goes without electric power for weeks at a time. This kind of long-term energy crisis has closed hundreds of factories and put literally millions of people out of work or, at best, into the ranks of the partially employed.

Nigeria has underinvested in its national power system for many decades. The oil money of the past simply did not go into national development. Much of the money was just siphoned off by corrupt officials in previous regimes.

Now things are desperate. A Nigerian government committee recently stated that Nigeria requires $85 billion in immediate short- and medium-term investment to meet its domestic power demand. But it would be physically impossible to install that much new capacity in just the next few years.

Impoverished and Restive People…

While some of the elite live in gated compounds, most of the population of Nigeria lives in slums. Most Nigerians lack electricity and potable water. Food prices are exploding, causing the average caloric intake of many people to decline.

According to the World Bank, nine out of 10 Nigerians live on less than $2 per day. There is no form of public health care in Nigeria, and a serious illness is either a ticket to penury or a death sentence.

Nigeria’s roads are a maze of potholes, bad bridges and washouts. The lack of adequate transportation infrastructure makes it difficult to conduct all but the most rudimentary businesses. Unemployment is rampant, idle youth are ubiquitous and violent crime is on the rise – along with violent radicalism.

To make ends meet, many Nigerians who live near the oil patch engage in a practice called “bunkering.” That is, they tap into oil and fuel pipelines by simply drilling holes in the pipes. Then they siphon off oil or other refined products for sale in the black market. Sometimes, the jury-rigged connections fail, which leads to massive explosions and fires.

Accidents, plus ongoing sabotage by a vigorous insurgency and rampant kidnappings of oil workers, have made oil exports from Nigeria quite problematic. Indeed, Chevron (CVX) recently declared force majeure (not having to fulfill contract obligation due to uncontrollable events) on several export contracts when a main pipeline was attacked and destroyed by militant Nigerians.

It’s not just the oil pipelines that are a mess, either. Nigeria’s four state-owned refineries can operate only intermittently due to mismanagement and sabotage. So Nigeria’s fuel distribution network is chaotic. Nigeria even has to rely on fuel imports to meet basic domestic needs for cooking and transport. These imports cost Nigeria some $4 billion each year.

A Failing State With Lots of Oil Money…

By normal measures, Nigeria does not function. Life and governance are in a bare-bones form of organized chaos. There is a slim pretence of organized state power and control. Nigeria is a failing state, despite its oil wealth.

Most of the Nigerian population survives despite what its government does, and certainly not because of it.

And in the West – in the U.S., in particular – we may all yet feel the pain of a distant land as it descends into the abyss of nongovernance.

Until we meet again,

Byron King

Source: Major U.S. Oil Supplier, Nigeria In Trouble

Market participants shrugged off supply threat news from Nigeria. Royal Dutch Shell reported that it had shut in production at its main offshore oil field after an attack by boat by local militants. The Shell platform produces 200,000 barrels a day.

Instead traders focused on a decision by China’s National Development and Reform Commission to raise gasoline, diesel and jet-fuel prices by 17, 18 and 25%, respectively.

“This follows the trend of other Asian countries reducing government fuel subsidies, which should, over time, put a dent in demand,” said analysts at Action Economics.

However, Sean Brodrick, a natural resources analyst for MoneyandMarkets.com, wrote that “oil bears and stock bulls alike are seizing on this news from China like drowning men grasping at lifelines … [but] I hope they can live with disappointment.”

Upping China’s gasoline and diesel prices by 46 cents a gallon, is “probably not enough to have much impact on existing demand,” Brodrick said.

Source: Crude Plunges

Violence has shut about 20% of Nigeria’s oil production since early 2006.

“The market is so concerned about supply that just about any headline can unnerve traders,” said Phil Flynn, of Alaron Trading. “Once prices began moving higher, there was a massive move to purchase futures.”

Also yesterday, the International Energy Agency said it will attend talks convened by Saudi Arabia on June 22 between producers and oil-consuming countries in an environment of record oil prices.

“We would welcome an opportunity to act collectively to reassure the market about future demand and supply balances in order to change the perception of extended tightness,” said IEA Executive Director Nobuo Tanaka.

Source:  Oil Rallies as Roller Coaster Continues - Nigeria Moves to Stabilize Production

Michael Lynch, president of Strategic Energy & Economic Research, believes the long-term trend is down.

“Certainly, a political disruption of oil supplies — civil war in Nigeria, major fighting in southern Iraq, attacks on Caspian pipelines — could occur and would send prices sharply higher, but overall there is a greater likelihood that prices will drop in the next few years, and perhaps sharply,” Lynch wrote.

But John Person, president of National Futures Advisory Service, said he wouldn’t be inclined to call a top “until we close back under the $118 level, which was close to the high made last month.”

All of which is of little concern to drivers, who watched as the retail price for a gallon of regular gasoline climbed to another record of $3.962 Friday, according to AAA’s Daily Fuel Gauge Report. That’s up 24.2% from a year ago.

Source: Oil Little Changed – Gallon of Regular Sets Another Record

Right now the gold-to-oil ratio is trading around 7. That means a single ounce of gold is roughly worth seven barrels of light sweet crude. With oil trading near $130 a barrel, this is an extreme low point for the ratio.

The previous drop in mid-2005, when an ounce of gold was briefly worth 6.5 barrels of oil, was the lowest the ratio has been in decades.

Oil Too Expensive, or Gold Too Cheap?

So what does it mean when the gold-to-oil ratio moves toward an extreme like this? In historical terms, it suggests that something is out of whack. Either oil has gotten too expensive, or gold has gotten too cheap.

The last time we saw an extreme in the other direction was late 1998, when the gold-to-oil ratio rose above 26. That was a case of oil being way too cheap… and of course, crude oil bottomed out for all time just a few months after that.

Given the way oil is trading now — the recent rocket ride to $130 a barrel, etc. — some think that oil has gotten too expensive, too fast. Their view would be that the price of oil has to come down, perhaps by a lot, and that the gold-to-oil ratio is reflecting this.

Your humble editor disagrees with this view for a number of reasons.

For starters, there’s a lot of hot air about how oil could be a bubble and speculators are driving oil prices… but there is little proof of this charge, and a lot more evidence pointing in the other direction.

Germany’s Folly

Angry German politicians have gone so far as to call for a worldwide ban on oil trading. They think that $130 oil is all the evil speculators’ fault, and that all the traders should have their hands tied.

This is about the dumbest thing I’ve ever heard, and a good example of how politicians can be dangerous. One of the key functions of markets is price discovery; through self-interested buying and selling, the markets act as a useful forecasting tool. (One of the best forecasting tools we have at any rate.)

Without a functioning market mechanism to determine the price of a valued good, the market breaks down. You either have lots of one-off transactions taking place in the dark, or else you have some government committee setting the price by fiat. I hear Soviet Russia tried that. It didn’t work out too well.

The activity of traders and speculators also provides much-needed liquidity to markets. When, say, an airline like Southwest buys heating oil futures contracts to lower its exposure to jet fuel costs, more often than not there are traders on the other side of the transaction. Without someone to take the other side of a trade, end-users of oil and gas products have no way to hedge their business risk.

In a very real sense, speculators are paid to take on risks that hedgers don’t want. Risk transference is a vital market mechanism. The German politicians don’t get this. Or maybe they do get it, but they just don’t care.

Trying to restrict trading would be a fool’s errand anyway. There is more than enough competition among global exchanges to keep the trading going, even if some goofball government tries to ban trading on a local basis. That’s a very good thing.

Et Tu, George?

Hedge fund legend George Soros is blaming the speculators, too, calling the oil price a bubble. Without putting too fine a point on it, this is a major piece of hypocrisy.

Why? Because the existence of men like Soros show exactly why big markets are hard to manipulate.

If the price of oil were truly in a bubble, some big hedge fund player with guts and foresight could come along and make a killing by shorting the daylights out of it… thus driving the price of oil back down to non-bubble levels in the process.

This is exactly what Soros himself did in 1992. That was the year he earned the nickname “The Man Who Broke the Bank of England,” for the huge score he made shorting the British pound.

This from the Financial Times:

The spot price of Nymex West Texas Intermediate hit a record $130.30 a barrel on Wednesday. On Tuesday investors had rushed to buy oil futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 on the day.

Veteran traders said they had never seen such a jump and said investors were increasingly betting that oil production would soon peak because of geopolitical and geological constraints.

“The dollar is one major culprit behind skyhigh oil prices, says Justice Litle in Taipan Daily, “but there are many other small factors that add up.”

“For example, China, after suffering through its worst earthquake in decades, has had to shut down mines and wells for safety reasons. Apart from the terrible human tragedy of more than 34,000 lives lost, this can only add upward pressure to oil prices.

“In South America, Venezuelan oil exports recently dropped to a five-year low, and evidence is mounting that the country has become a state sponsor of terrorism under Hugo Chavez.

“In Nigeria, rebels continue to keep oil and gas production on a knife edge. In places like Russia and Mexico, oil and gas output is declining at an eye-opening rate.

“The little things pile up; if it’s not one thing, it’s another. This is generally the case when supply and demand are so tightly matched there is almost no margin for error. That’s where we stand now in terms of global oil demand vs. available daily supply.”

“It’s just a token increase but it shows that the Saudis realize just how important it is for the president to not come back empty handed,” said Peter Beutel, president of Cameron Hanover Inc. in New Canaan, Connecticut. “This is about a lot more than oil, the special relationship between the countries is at stake.”

Saudi Arabia, the world’s largest exporter of the black goo, said it would raise output by 300,000 barrels a day to 9.45 million barrels a day in June, following a meeting between Bush and Saudi Arabia’s King Abdullah.

However, according to an OPEC report, Saudi Arabia’s April oil production was 9.02 million barrels a day, down 37,000 barrels a day from a month earlier, while Nigeria’s output fell by 251,000 barrels a day. This means the all the Saudi supply increase will offset declines last month.

“It’s almost funny to watch the reactions of politicians everywhere,” says Manraaj Singh in Profit Watch. “Someone must have forgotten to tell them that OPEC is a cartel. Its job is to make its members rich, not provide cheap oil to faltering Western economies.”And it must be doing something right… because the petrodollars are really beginning to pile up.”

Read on here find out why Arab oil wealth is set to dwarf the US economy.

But from a technical analysis point of view, there is no longer any overhead resistance – nothing to stand in the way – and the price can go anywhere. But where?

We saw exactly the same thing with uranium last year, we saw it with wheat, corn and soybeans this year; we saw it with copper, lead, zinc and nickel, we’ve just seen it with rice; we saw it with UK housing; we saw it to an extent with gold, though that one didn’t run wild; we’re seeing it with coal and iron ore; and we’re starting to see it with food.

In these inflationary times, it’s going to be a recurring vision, so better get used to it. But just how far is the oil price going to go?

Why this won’t be the highest point for oil in the long term

Oil is now well and truly at unheard-of levels, even adjusting for inflation. However, to those bears who are calling the top, I’m not saying that looking for a short-term shorting opportunity is unwise. But you shouldn’t expect this to be the highest point that oil hits in the longer term.

The price may decrease, but Peak Oil is yet to strike

As soon as people say, ‘it’s different this time’, you can be sure the top will be in within a few weeks. But, when Peak Oil – the point at which we are getting as much oil out of the ground as we ever will – strikes, it really will be different this time. Is Peak Oil kicking in now? I would say fears of Peak Oil have certainly been pushing the price up for some five years or more.

“The combination of the weak U.S. economy and a strengthening dollar continues to put downward pressure on oil,” said James Williams, of WTRG Economics.

Supply worries have eased after the re-start of a major Scottish refinery following resolution of a two-day strike on Tuesday. And Exxon said that upstream affiliates in Nigeria confirmed they’re in the process of production start-up following resumption of services by the senior staff workers union.