First, just a word on today's highs: the immediate cause was the combination of new terrorist threats against Saudi Arabia (with the US closing down the Embassy there) and production glitches in US refineries

Crude hits new highs amid security fears (FT)

Crude oil prices hit fresh record highs on Monday as speculative interest more than doubled in the wake of recent refinery outages and renewed geopolitical tensions.

Speculators on the New York Mercantile Exchange in the week to August 2 increased their net long positions to 26,070 contracts from 11,929 contracts, the Commodity Futures Trading Commission said last Friday.

(...)

The main impetus on Monday came from renewed security concerns in the Middle East, as US embassy and consulate buildings were shut in Saudi Arabian cities.

Terror worries push oil price towards $64 (FT)

Meanwhile, a sequence of accidents and lack of spare capacity mean refineries could face difficulties meeting global oil demand this winter. The International Energy Agency, the industrial countries' energy watchdog, has forecast that oil consumption will reach 85.9m barrels a day in the fourth quarter, up from 83.7m b/d today.

"The profusion of recent snags in the US refining system suggests that the system is being pushed beyond its sustainable limits and that interruptions are more likely," said Kevin Norrish, of Barclays Capital in London.

What this underlines once more is how tight the supply is - both on the production front, and on the refining side. There is barely enough oil produced, and barely enough capacity to crank out the gasoline we burn with such abandon.

Any disruption anywhere now has an impact on prices, whether it is unscheduled maintenance on a refinery, a hurricane hitting the Gulf of Mexico, a strike in Nigeria or in Norway, a terrorist threat in Saudi Arabia. So far, the disruptions in recent months have been relatively minor, which explains why oil prices have only jumbed by a few percentage points each time, but bigger disruptions have happened with regularity in the past, with an impact on overall production that the current market would be unable to cope with. Any of the Venzeuela conflict, the Nigeria strife or the Norway strike in 2002-03 (not to mention the drop linked to the Iraq war) would take out of the market more than the current spare capacity, optimistically estimated at 1.5 mb/d - the same 1.5 mb/d that Saudi Arabia has been promising us for the past two years and which have never appeared.

Look at the following OPEC production tables (from Middle East Economic Survey, a respected newsletter on the region, click on the pictures for the links):

In the first half of this year, OPEC has barely produced 1mb/d more than in the first half of last year, and it is still producing less than last autumn. Saudi Arabia contributed less than half the increase, and has never gone above the 9.5 mb/d level which is widely estimated to be its effective production capacity of light oil. As stated above, demand is expected to increase by 2.2mb/d by the end of this year. Will any of it come from Saudi Arabia or the rest of OPEC?

Meanwhile,

Oil Prices Hit New High, Near $64 a Barrel (AP via Yahoo)

The average nationwide price for regular unleaded gasoline is $2.34 a gallon, or 46 cents above last year, according to the Oil Price Information Service of Wall, N.J. Still, government data show that gasoline consumption is up almost 1 percent at 9.1 million barrels a day through July, compared with last year.

Gasoline prices increased by 25% in one year, and demand ... increased. When I wrote that demand was not very reactive to prices, I was not joking. What kind of price increase will be required to actually see demand reduction? Something somewhat bigger than 25%, it appears.

And WE WILL REQUIRE DEMAND REDUCTION for demand and supply to match.

A reminder, from the National Commission on Energy Policy, published a few weeks ago:

In a scenario confronted by the bipartisan panel of intelligence, military, and energy experts, a series of events over several months - unrest in Nigeria, an attack on an Alaskan oil facility, and the emergency evacuation of foreign nationals from Saudi Arabia - drives the price of oil to over $150 per barrel. These events lower expected employment levels by more than 2 million jobs, embolden countries that are major oil producers and consumers to pressure the U.S. on key foreign policy concerns, and cause a variety of other significant economic and security challenges.

The scenario removed only 3.5 million barrels of oil from a global market of more than 83 million barrels [per day, sic], resulting in the following consequences:

• Gasoline prices of $5.74 per gallon;
  
• Global oil price of $161 per barrel;
  
• Heating oil prices of $5.14 per gallon;
  
• Fall of gross domestic product for two consecutive quarters;
  
• Drop in consumer confidence by 30 percent;
  
• Spike in the consumer price index to 12.6 percent;
  
• Ballooning of the current accounts deficit to $1.087 trillion;
  
• Decline of 28 percent in the S&P 500;
  
• Aggressive pressure on the U.S. from China to end arm sales to Taiwan, and;
  
• Demands from Saudi Arabia for changes to U.S. policy regarding the Mid-East peace process.
  

So, to cope with a 4% drop in supply, a tripling of the oil price is necessary, in what was by necessity an optimistic scenario.

Do you still want to bet against 100$ oil before year end?