Oil to Set New High

Jim Brown
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The National Australia Bank claims the price of oil will hit $88 within a week according to their technical analysis.

The NAB is the fourth largest bank in Australia and has a decent energy analysis department. Analyst Gordon Manning said the technicals support a higher high over the $87.09 set last week. He claims crude has broken out of a fairly long consolidation period and should continue its breakout momentum. He believes the $82.50 bottom on Tuesday is the new support low.

The Nymex reported that crude oil futures traded on record volume on Wednesday. The Nymex estimated volume to be 1.42 million contracts. That is the equivalent of 1.42 billion barrels of oil according to the Nymex spokesman. The previous record was 1.12 million contracts on April 9th.

Wednesday also set a record for futures that delivered physically and settled for cash. The previous record was 1.2 million contracts on June 6th 2008.

Tuesday's volume was 1.06 million contracts as the low was made at $82.51. That is 68% above the average volume of the past three months. Open interest was 1.39 million contracts.

That last sentence is a clue to the volatility. If open interest was 1.39 million contracts and 1.42 million traded there is one heck of a lot of day trading going on in the futures. This is likely to bring back the hostility from regulators over price moves due to speculation. However, I don't know how they could claim it was manipulation since the volume of trades was more than the open interest. That is the very definition of a liquid market with tens of thousands of traders constantly buying and selling.

I never cease to be amazed by the number of companies that are stepping up to do deals in Venezuela. Chavez has nearly bankrupted the country and nationalized all the oil companies and kicking out those who complained. Almost every week we hear of another company/country making a big investment just like conditions were normal.

This week Japan's government backed Japan Oil, Gas and Metals National Corp, said it will invest 32 billion yen between now and 2017 in the Orinoco heavy oil projects. Japan said it would provide capital and financing for itself and several partners to develop three blocks in the Carabobo area. The partners are supposedly planning on producing as much as 400,000 bpd at the project.

I have one warning for these "investors." Don't believe for a second that Chavez has changed his stripes. If there is money to be stolen he will steal it. PDVSA expects to be 60% owner in the project and that should be the first warning sign. Even more amazing, Chevron, through its participation in the Japanese joint venture will end of with 34% through a subsidiary.

Exxon, Conoco and Venezuela are currently in arbitration court over reparations for Chavez nationalizing their assets in the country. Exxon and Conoco have claims worth about $27 billion against Venezuela. The recent sales of Syncrude plus these investments into Venezuela by Russia, Japan, China, etc all go into the valuation used by the arbitration court in determining what Exxon and Conoco will receive. Once they decide the number is final. There is no appeal. When you add all these claims together along with other debt owed by Venezuela plus recent commitments made by PDVSA to all these new projects there is not enough money in VZ to pay everything regardless of who is president.

There is little doubt that the country is going to implode by 2011 and Chavez will likely end up on the wrong end of the revolution. Maybe that is what all these countries are counting on when they are making these deals. They are hoping to be first in line when the new government takes control and realizes their only hope of solvency is to let these countries produce oil and refloat the economy. Dang shame, Chavez will probably be pushing up daisies somewhere and won't be able to steal the money.

Jim Brown

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