Kudlow’s Money Politics

Surprise Drop in Oil?

A few days ago, Prince Turki al-Faisal, the Saudi Arabian Ambassador to the U.S., told the United States Energy Association that any U.S. conflict with Iran would threaten the Strait of Hormuz and triple the price of oil.

Perhaps Prince Turki is trying to get President Bush to rule out the military option in the Iranian standoff over weaponizing their uranium enrichment program. Of course, President Bush won’t do this, as he should not.

Direct negotiations with Iran, a good idea in my view, will proceed with any number of items on the table, including trade, investment, Iraq, human rights, and so forth. But the Iranians must know that the United States is prepared to defend its security interests if it comes down to that.

Meanwhile, back to the matter of oil prices, the more imminent reality could actually be a sizable price decline, rather than a huge increase. The Energy Department just announced that crude oil supplies rose 1.4 million barrels to 347.1 million for the week ended June 16. Analysts had been expecting a drawdown, not an increase.

Crude oil supplies in the U.S. are now at their highest level since May 29, 1998, when oil was trading around fifteen bucks a barrel. In addition, Canadian inventories are also fully stocked.

Oil tanker executives have recently confirmed that oil in storage aboard very large crude carriers, floating on the high seas, is abnormally high. And, Chevron CEO David O’Reilly informed us recently that gasoline and energy demands here in the U.S. have flattened out, and may be showing signs of declining somewhat.

The bottom line to all this is that Prince Turki’s $200 oil scenario or not, there could very well be a near-term correction in oil prices that will drop far more than anyone imagines possible. Supplies are at their highest levels in eight years, while demand appears to be falling. This of course, would be welcome news for both the stock market and the economy.

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