Crude oil futures hit a 3-month low on expectations of a continued dip in demand and a stronger U.S. dollar.

Crude oil for September delivery yesterday (Tuesday) dropped $2.57, a decline of 2.1%, to settle at $122.16 a barrel on the New York Mercantile Exchange, Bloomberg News reported.

Earlier in the day, crude oil futures had traded as low as $120.75, its lowest intraday trading level since May 7 and an 18% drop from its July 11 intraday high of $147.27.

High gas prices at the pump do seem to be slackening consumer demand. Demand for oil and petroleum products declined 4.3% in May from the same period a year ago.

"This demand thing has some bite," James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois, told Bloomberg. "I can really see a crude market here that could drop down to $100 by the end of summer or early fall."

An Energy Department report slated for release today (Wednesday), is expected to show gasoline inventories rose 400,000 barrels last week, according to Bloomberg data. However, reports vary as MF Global Ltd. (MF) data predict a decline of 1.1 million.

The dollar gained 1.2% against the euro yesterday, climbing to $1.556 from $1.5741 on Monday. The greenback also gained against the yen, climbing 0.7% to 108.18 yen from 107.46 the day before. The stronger dollar put some downward pressure on dollar-denominated commodities prices as their appeal as an inflation hedge eased.

Comments from Organization of Petroleum Exporting Countries (OPEC) President Chakib Khelil predicting that crude oil prices could fall to $70 – $80 per barrel over the long-term added to the downward pressure. Khelil feels oil could fall if the greenback can continue to gain against other major currencies and certain political tensions, most notably in Iran and Nigeria, began to ease.

 "The price today is abnormal at $123 a barrel," Khelil said yesterday, speaking to reporters on a visit to Jakarta to meet Indonesia’s energy minister, Reuters reported.

When asked whether or not OPEC member nations were concerned about a drop in the price of oil, Khelil said, "We are not worried about any price, because we don’t decide the price. We just meet the demand."

He stated that OPEC would not cut production in the face of lower crude oil prices, as the nations would continue to produce enough to meet global demand.

"Whether [crude oil] prices drop to $80 … or not, there can only be the unavoidable conclusion that markets are finally working as they are supposed to, as higher prices inevitably act as a brake on demand," John Kilduff, an analyst at MF Global, said in a note to clients, MarketWatch reported.

News and Related Story Links:

• Bloomberg News:
  Oil Drops on Stronger U.S. Dollar, Signs of Falling Fuel Demand

• MarketWatch:
  Crude futures fall near three-month low

• Reuters:
  "Abnormal" oil prices could fall to $80: OPEC president

Oil’s recent wild ride has some market experts questioning which way black gold is headed in the weeks, months, and even years ahead.

Oil dropped over 11% during a volatile week of trading, as reduced consumer demand put downward pressure on the once hot commodity. Crude oil for August delivery ended the week at $128.88, its lowest level since June 5 and well off its July 11 peak of over $147 a barrel.

"If this is not the [crude oil] bubble’s implosion, than it’s a reasonable facsimile," analyst and trader Stephen Schork said in his daily market commentary, the Associated Press reported. "Perhaps all we have witnessed was a replay of last August’s subprime induced sell-off. Time will tell.
Nevertheless, for the time being we no longer care to hold a bullish view."

Mid-week, the Energy Information Administration reported that U.S. consumer demand for gasoline had fallen 2.1% from the same period last year due to high oil prices. And while that certainly had an effect on the price of crude, some unusual buying from Mexico might also be to blame.

A handful of analysts told CNNMoney.com that Mexico’s state-owned Petroleos Mexicanos, or PEMEX, the fifth largest global oil producer, was signing contracts at current prices for years into the future. Some say it’s a sign that Mexico is betting oil prices have peaked.

"This is a smart move," Phil Flynn, senior market analyst at Alaron Trading in Chicago, who also thinks there’s a good chance prices have peaked, told CNN. "If I were an oil producer, I’d want to lock in these prices."

Others have written the contracts off as just an attempt by the Mexican government to do some long-term budget planning. And while that could be true, if other large oil producers follow Mexico’s lead and start to put similar long-term future contracts in place, it’s going to push down the price of oil.

"I don’t know who else is doing it," said Nauman Barakat, an energy trader at Macquarie Futures, and one of the traders who mentioned the Mexico news in a research note. "There’s been a lot of talk, but it’s kept very confidential."

When asked if such moves could cause oil prices to sink lower, Neal Dingmann, senior energy analyst at Dahlman Rose & Co., didn’t equivocate.

"Absolutely," Neal Dingmann. "It could create a top in [oil prices] in the near term."
Analyst Olivier Jakob of Petromatrix in Switzerland told the AP that Nymex futures were "getting into deeper trouble," based on his technical analysis of how oil prices were developing.

"Buying here is an opportunity if you are a deep believer in $200 (a barrel), otherwise we think that caution would be better applied," Jakob said in a research note.

But not everyone is trying to lock in today’s prices for tomorrow’s sales. Industry giants like Exxon Mobil Corp. (XOM) don’t even play the futures game according to Fadel Gheit, a senior energy analyst at Oppenheimer & Co. (OPY).

"Exxon produces 1.2 billion barrels of oil a year," Gheit told CNN. If Exxon Mobil locked in all that production for five years out at today’s prices, and crude fell 20%, "it would be a disaster," he said.

And you won’t see a member of the Organization of Petroleum Exporting Countries doing deals similar to Mexico’s. OPEC members like to have the flexibility to produce less to drive up oil prices. Those nations won’t give up any potential price control by locking themselves into contracts too far out into the future.

"You get stuck with this extra production that’s out there," John Kilduff, an energy analyst at MF Global Ltd. (MF) in New York, told CNN. "Then OPEC has to reduce market share just to maintain price."

News and Related Story Links:

• Associated Press:
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• CNNMoney.com:
  Oil futures: Know when to hold ‘em

• MarketWatch:
  Crude falls for fourth day; down 11% for the week

Oil prices may be headed for $100 a barrel by the end of the year, after speculators successfully pushed crude oil prices through the $90 a barrel level late last week.

But many Contrarian Investors believe that – despite the continued strong worldwide demand for oil – prices are already over-inflated by speculators, and are slated to drop. The fact that prices fell back into the high $80s from the record levels last week is a strong indicator.

In short, speculative investors will be looking to drive the price closer to $100 a barrel by December. And Contrarian thinkers think oil is poised for a big letdown.

On Friday, crude futures hit $90.07 during intraday trading, before settling at $88.60 a barrel on the New York Mercantile Exchange, down 87 cents from their Friday opening. Prices have quadrupled since 2002 and are closing in on the inflation-adjusted peak of $101.75, reached in April 1980.

Prices are up 28% since August and 19% in the last nine trading days, despite the assertion of many analysts that the underlying supply and demand fundamentals do not support such a bullish trend. But proponents of higher oil prices cite soaring demand from emerging markets, a weak U.S. dollar, lower-than-expected inventories, OPEC controls, and volatility in oil-producing nations as factors that will continue to spur prices higher.

Now, according The Wall Street Journal, the already large existing number of options held to buy crude at $100 a barrel could also drive the price of oil higher. As of last Thursday, there were nearly three times as many options held to buy the December crude-oil-futures contract at $100 a barrel as there were to sell the contract at $80 a barrel.

According to the Journal, a large concentration of bets on options at certain levels can act as a magnet for crude-oil prices. As the options-expiration date approaches, traders try to push futures prices to levels where their options become profitable.

"We haven’t seen the last shot above $90 because there are a lot of people betting on $100 oil," Starsupply Petroleum broker Justin Fohsz told Business Day. Many speculators are seeking refuge from a volatile stock market – a market prone to even wilder trading patterns because of the ongoing credit crunch and still-weak greenback – which they say have made oil futures a bargain for overseas investors.

‘Significantly Overpriced’

But oil futures seem to be soaring to record highs every week, leaving some analysts wondering when the speculative bubble is going to burst.

"Like all bubbles this will burst at some point," Kyle Cooper, research director at IAF Advisors in Houston, said in recent media reports. "What I don’t know is if it will be here at $100 or $120."

Alexei Kudrin, Russia’s Finance Minister also believes the price of oil is destined for a correction.  "Oil is significantly overpriced," he said at a briefing Saturday. "The price is at a speculative level and has heated up because of conflicts in oil producing regions. The jump in price is temporary."

"Based on our studies a realistic price is closer to $50 a barrel," he went on. "Taking into account inflation, oil will increase a little bit and will be at about $60 a barrel in 10 years."

Regardless of whether or not crude prices return from orbit, many analysts agree that oil at $100 a barrel is a foregone conclusion. The price of light crude fell 1.17% yesterday (Monday), to $87.56.

News and Related Story Links:

• Money Morning:
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• Money Morning:
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• Associated Press:
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• China Post:
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• Wall Street Journal:
  Options Bets on Crude Could Pull Prices Higher.

• BusinessDay:
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Readers may well have missed the news that Ukraine is currently putting together a new coalition government led by reformist Julia Tymoshenko.

“So what?” you may ask. “I can’t know everything. And besides, how do you ever expect me to make a buck out of Ukrainian politics, a murky affair at best?”

Well, let me tell you a secret to emerging markets investing: The really big returns are made by spotting new markets as they begin to emerge, and then surfing the long wave of their emergence. The story of the independent countries that split from the Soviet Union is mostly a sad one, but there are a few gems beginning to emerge. There isn’t much to plunge into yet, particularly as a U.S. investor, but they’re well worth keeping an eye on.

Beginning first with all those confusing ones called “-stan” – I have to look up whether there are four or five of them. Uzbekistan, Tajikistan and Turkmenistan are backward dictatorships with few redeeming features, only modest amounts of resources and close ties to Vladimir Putin’s mob in Russia.  Kyrgyzstan is an emerging semi-democracy, with an almost functioning free market. Alas, it has only 5 million people, a puny Gross Domestic Product (GDP) of $10 billion, a modest growth rate, and no oil.

Kazakhstan’s the one with the oil. Unfortunately, it also has one-party government, high corruption and close ties to Putin. Nevertheless, with 15 million people, a much chunkier GDP of $53 billion and a growth rate of 10.6% in 2006 there’s money being made there. It has oil pipelines to the Black Sea and to China, so it’s not dependent on Russia to get its principal export to market. An international consortium led by Italy’s Eni SpA is currently drilling at the Kashagan oilfield, a huge project expected to have cost $130 billion by the time it comes on-stream in 2010. Since the Kazakh oil company Kazmunaigaz is state owned, Eni, itself (E), which has a price-earnings ratio of only 10 (well, NOBODY trusts the Italian government, which owns 39% of Eni), is worth looking at – what’s more, you get to share Eni’s new investment in Libya, another fun place with lots of oil!

The Baltic States – Estonia, Latvia and Lithuania – are well known; all three are now members of the European Union (EU), and have enjoyed rapid growth. They’re small, though, and there’s not much for U.S. investors to buy there. Estonia is the most exciting, with a growth rate of around 8%; Latvia, with a similar growth rate, also has a huge balance of payments deficit, which is rather worrying. Lithuania is growing somewhat less fast, and is the least glossy of the three.

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Armenia and Azerbaijan fought a war with each other only a decade ago, which doesn’t fully rule them out, but is still a factor to be considered. Armenia has a population of 3 million, a GDP of $6 billion, and a 13% growth rate; Azerbaijan has a population of 8 million, a GDP of $14 billion, and had an astounding growth rate of 34% in 2006 – that’s what opening a new oilfield will do for you. Unfortunately, neither country has any companies with American Depository Receipts (ADRs), nor does there seem any obvious way to play them – BP PLC (BP) is the most important oil company in Azerbaijan, but it’s a small part of its business.

Then there are the two non-Baltic, ex-Soviet republics that are showing signs of becoming real democracies: Georgia and the Ukraine (though Armenia and Kyrgyzstan are fairly close).

Georgia is small – 4.6 million people and a $5.3 billion GDP – but it has a splendid pro-free-enterprise government under Mikheil Saakashvili and a growth rate of 9.3% per annum that is dependent on real effort, not just oil prices. The other good news about Georgia is that it is the least corrupt country in the former Soviet Union (except for the Baltic states). Alas, that’s a bit like saying someone’s the least evil mobster in the Bambino crime syndicate, but at #79 on Transparency International’s Corruption Perceptions Index, Georgia is only just below India and China. The Bank of Georgia is probably the best way to play the country; regrettably that is listed in London (BGEO) but not in the US.

The Ukraine is much larger: It’s got 46 million people, an $82 billion GDP, and had a decent growth rate of 7% in 2006. For those who haven’t been following, Ukraine’s shaky democracy has recently been the scene of a huge tug of war between the pro-Russian east and the pro-Western, pro-democracy west. The Orange Revolution of December 2004 was supposed to mark the victory of pro-free market forces, but President Viktor Yushchenko proved feeble, and his first democratic government, with Julia Tymoshenko as prime minister, experienced its demise.

Since then, there has been an uneasy coalition between Yushchenko, as president, and the Putin-supported Viktor Yanukovich as prime minister. However, in last month’s election Tymoshenko – once again allied to the remnants of Yushchenko’s support – won a small-but-decisive majority and now seems poised for form a government.

Julia Tymoshenko made an oil-and-gas fortune in the 1990s, and is a very tough cookie. Imagine a cross between Madonna and Hillary Clinton and you have her style. (Amusingly for onlookers, there was a very old-time-Chicago series of delays in counting the election results, as first Donbass, controlled by Yanukovych, and then downtown Kyiv, controlled by Tymoshenko, had unexpected delays in announcing their results – in each case, a landslide for the local favorite with suspiciously high turnout!).

Putin hates her, which is a worry since Russia, through Gazprom, has the ability to turn off Ukraine’s heating every January. Fortunately, in doing so, they turn off half the EU’s heating as well, so there may be limits on how rough Putin wants to play.

However, Tymoshenko understands how a free economy works, and is determined to clean up the corruption in Ukrainian business, so prospects for Ukraine’s emergence currently look good. Don’t forget, the country has a 99.4% literacy rate and 15% rate of college graduations, yet a per capita GDP of only $7,800 – even at purchasing power parity – so there’s a hell of a lot of room for growth.

Like the other ex-Soviet states, Ukraine doesn’t have a lot of ADRs. It makes sense for a country with EU ambitions to list its shares in London first, but the hugely expensive requirements of the Sarbanes-Oxley Act must also be a factor. Even when ADRs are available, they don’t trade – the big electric power company Centrenergo (CTEUY.PK), for example, last traded 3 months ago. What’s more, there aren’t any mutual funds with more than a small share of their investments in Ukraine.

That’s bound to change, however, as the country opens up. We at Money Morning will keep an eye on the Ukraine, and will report back to you if and when their rapid growth inevitably brings investment opportunities. When that happens, the Ukraine will probably be well-worth buying.

Even in the apparent basket cases of the non-Russian former Soviet Union, there are growth opportunities and investments worth buying. The wise emerging-market investor must cast a wide net.

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China’s top oil producer, PetroChina Co. Ltd. (PTR), has raised its production estimate for the Jidong Nanpu oil field. The field is located in the Bonhai Bay area and is one of China’s biggest discoveries in recent history.

"We estimate that, eventually, we could have proven reserves of as much as 1 to 1.6 billion tonnes of oil equivalent from the offshore blocks of our Jidong Nanpu oilfield," company vice president Jia Chengzao said in an interview with China Daily.

"Including reserves from onshore the ultimate proven reserves of Nanpu oilfield are expected to hit around 2 billion tons," Jia said.

The Jidong Nanpu oilfield has combined proven, probable and possible reserves of 1.18 billion tons of oil equivalent according to the Ministry of Land and Resources. The government agency said last month that the field contained 445 million tonnes of proven reserves.

Jia told China Daily that it could take five to six years to confirm the new reserves. Meanwhile, PetroChina will make exploration efforts along side extraction work on the current proven reserves.

China will continue to explore its current reserves and search for new rich discoveries as nationwide demand continues to surge. Official estimates suggest that the country could contain as much as 65 billion tons of oil reserves, and approximately 25 trillion cubic meters of natural gas.

The hope is that more domestic oil production will reduce dependence on energy imports. China’s net oil imports rose 4.1% year over year to 47% of total consumption last year according to the Ministry of Commerce.

The International Energy Agency (IEA) said in July it expects China’s demand for oil to remain at 7.59 million barrels per day (bpd) for the rest of the year before rising to 8.05 million bpd in 2008 and to 9.96 million bpd in 2012. The IEA said China would be the main catalyst for rising oil demand across Asia, accounting for 48.9% of non-Organization for Economic Cooperation and Development demand by 2012.

A report by the agency also said that new refineries and the expansion of existing plants will contribute 2.3 million bpd to the China’s supply by the end of 2012. Leading the expansion will be Sinopec, the state owned oil major that has 1.3 million bpd pouring in from new projects and 360,000 bpd from joint ventures.

The IAE said refining capacity growth will accelerate next year with a 200,000 bpd project from Sinopec, a 240,000 bpd project from CNOOC (CEO) and another 260,000 bpd from the expansions of five other refineries.

Also, for long term reassurance, China is establishing footholds in Africa. According to the Telegraph, China now buys about one third of its oil from Africa, mainly from Angola, where a $1.6 billion deal to develop a new field was signed last May. Beijing also built a 900-mile pipeline in the Sudan and investing at least 16 billion. It is also spending another $2.4 billion on a new offshore oilfield in Nigeria.

Related Articles and Links:

China’s Crude Oil Imports Surge to Record High

From Staff Reports

Royal Dutch Shell PLC (RDS.A RDS.B) and Saudi Arabia’s Saudi Aramco have announced the $7 billion expansion of a refinery in Port Arthur, Tex., which will make it the largest facility in the United States, according to Forbes.com.

The refinery’s output will be beefed up from 275,000 barrels of crude per day all the way up to 600,000 barrels. The project is scheduled for completion by 2010. It will cost an estimated $7 billion, which is more than double last year’s estimate.

The two oil giants will share the cost as part of their joint venture, Motiva, headquartered in Houston. Motiva operates two other refineries in Louisiana. The company supplies approximately 7,700 Shell-branded retail outlets in the Gulf and East Coast regions.