Oil spiked to $140 on comments from the Organization of Petroleum Exporting Countries (OPEC) President Chakib Khelil. Khelil said Thursday (June 26) that crude oil could rise to $150-$170 per barrel this summer. His comments, coupled with reports that major exporter Libya is set to cut production, sent light sweet crude futures soaring past $140 per barrel in late New York trade.

New York trade took oil futures to a new intraday trading just past $140 just before the close Thursday. The futures settled to a record close of $139.64, a gain of $5.09 on the day. Prices climbed to $140.39 during early after-hours trade.

The day’s comments and events certainly do not bode well for expectations for already high retail gas prices. Combined with the higher corn and ethanol expected to result from Midwest flooding, the news looks sour for retail gas in the coming months. Those analysts who have been calling for $5 gas at some point during 2008 may see their predictions come to fruition sooner than anticipated.

What is especially disturbing about the strong spike in oil is that recently gradual downward movement in prices had led some to suggest the worst might be over for the time being. Of course, there have been a few similar points during 2008 where oil has slid back for a few days only to be followed by a powerful spike that erased the days of price declines.

Interestingly, about thirty minutes after the press release about President Khelil’s comments pushed oil higher, a leading Invesco investment analyst, Diane Carnick, said in an interview that her firm expects the oil bubble to burst soon. In fact, she called for a 25 per cent drop in oil prices over the next six months. This would certainly help return oil prices to more practical levels.

Carnick’s main reason for anticipating a bubble burst is a belief that oil demand in emerging markets, such as China, has been “overstated”. She believes that decreased demand is going to be a strong impact on pushing prices down. Some investment analysts have lowered guidance on big oil based on similar expectations. However, there is still a large contingent who believes supply cuts still control market pricing and will hold prices at current, or ever higher, levels.

Another market factor that helped push oil prices higher Thursday was the Fed’s maintenance of its funds rate. With the economy seemingly headed in a more positive direction, many economists are calling on the central bank to act fast to move interest rates back up. Higher interest rates would combat inflation and help spark a stronger rebound in the dollar. The dollar has come back off all-time lows in the last few months, but is currently in holding pattern, still at relative low marks.

A higher dollar is an important component to reducing consumer prices, including gas and food. A more valuable dollar gives consumers and businesses great buying power at the pump and in the store. Additionally, from a global perspective, dollar and oil price movement generally carries an inverse relationship. As the US is largely dependent on foreign oil, its currency provides direction for oil speculation and prices.

There has been much speculation about the direction the economy and many major financial markets will take in late 2008. As June nears an end, speculation soon gives way to reality. The reality is whatever happens in the coming months, the action could be powerful, and the effects could be long-lasting.

Market Recap

The Dow was flat Wednesday, up four points, but the tech heavy NASDAQ shot up 32 points. The Fed closed its policy meeting with no change in interest rates for the first time in several meetings. Indications from the announcement were that the next rate move would likely be upward to combat inflation. New home sales and prices both dropped in May. A .1 per cent upward revision in the first quarter GDP (to 1 per cent) was not enough to save the stock market from bolting to a new low for 2008. The Dow dropped 358 points with the NASDAQ and S&P down 79 and 32. Existing home sales were up but as usual, median prices were down. The biggest news that sent stocks spiraling were comments from the OPEC president suggesting oil could rise well above $150 per barrel this year. This was coupled with a report that Libya was set to cut production.

Neil Kokemuller
Thursday, June 26, 2008
7:25 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.