One on One with John Kilduff, Energy Analyst at MF Global
Thursday, August 20, 2009SUSIE GHARIB: Those higher jobless claims numbers that we told you about also triggered a drop in oil prices today. In New York trading, October crude futures fell $0.92 to $72.91 a barrel. Joining us now to talk more about the outlook for prices, John Kilduff, energy analyst at MF Global. Hi, John.
JOHN KILDUFF, SR. VP, ENERGY, MF GLOBAL: Hi, good evening, Susie.
GHARIB: So you're predicting $100 oil by the end of the year. That's a big move from where we are right now. Give us your analysis.
KILDUFF: Well, it's a very real possibility. Because of all the elements that are at work right now in the various markets, the recovery you see in the stock market, in a way for right now it's good news for us all that oil prices are where they are because it is a real validation that economic activity is back in the calculus of everything, particularly in China and certainly in what we are seeing in Europe. And as you mentioned today about the earlier in the show about the leading economic indicators showing another positive reading today, all combining to help push these oil prices up.
GHARIB: Is it real demand, John? Because we always hear about speculation in the markets, manipulation of the oil market, is this real economic activity?
KILDUFF: It's a combination of real economic activity. It's also a combination of demand excuse me -- inflation fears that are in this market that are being driven by budget and monetary policies around the world. Also the falling dollar is driving this prospect as well. So it's a combination of that and constrained supply. Saudi Arabia is chief among OPEC members in complying with their quota by 110 percent so they have really cut back as have our nation's refiners in terms of their run rates, the amount of gasoline and diesel fuel they are producing, also very much constrained, running at below 85 percent, really all year to try to keep a lid on burgeoning supplies.
GHARIB: Well, now that you bring up OPEC, they do have a meeting coming up on September 9th. Do you expect OPEC ministers to increase output, cut output or just keep it right where it is.
KILDUFF: It will be price dependent to a degree but to the extent we are below $85 a barrel, they will do nothing. However they are in a very activist mode, have been now for a couple of years. If prices continue to go higher, I would look for moves quickly by Saudi Arabia, especially to get more oil on the market and for them to convene via telephone if not in a special meeting to up all the production quotas to get the price under control. They don't want it to run away again and to trip us back into another round of a recession or economic contraction.
GHARIB: Let me back up a little bit again on your $100 oil prediction. What does that translate to at the pump? What would that mean for gasoline prices?
KILDUFF: Much higher obviously. I do want to say, I'm not saying it a virtual lock. Because there will be price resistance at points such as $80 and $85 a barrel. There will be consumer pushback as gasoline retail prices climb well above that $3 level. Last year we didn't see the consumer pull back really until gasoline prices got over $4 a gallon. Of course this year the consumer here especially in the United States, much more impoverished, doesn't have the ability at all to withstand those kind of numbers. So the push up towards $1 -- will be felt and reacted to but I do think we're going to see it because of the various factors that we talked about. The U.S. dollar going down, inflation pressures and real demand, particularly out of China and the rest of the world where they use a lot of diesel fuel. There's a big call for it. And look for it to be, the stocks that we do have on hand to be dwindled quickly.
GHARIB: A lot has been made of the economists that we talked to on our program that the economic recovery may not be a very sharp recovery. It may not be a very robust recovery. It could be mild. If that were the case, what does that also mean for the price of oil? Maybe China is booming but if the U.S. economy isn't, could that keep a lid on oil prices?
KILDUFF: Unfortunately, what we have is a bit of a structural deficit in terms of crude oil production globally and refining capacity. As we approach even near normal economic activity we are in a tight energy supply situation as it relates to fossil fuels or crude oil based fuels. So we saw China just last month imported another record amount of crude oil, rivaling last year's stellar numbers. So that is fear and that is why you are seeing energy prices really run ahead of every other asset class in terms of pricing in the recovery.
GHARIB: All right, we're going to have to leave it there. John, thank you so much for coming on the program tonight.
KILDUFF: Thank you.
GHARIB: My guest tonight John Kilduff of MF Global.
