The forecast, if borne out, will be another example that the cliche of a ‘’weak second quarter'’ may be true for oil demand, but isn’t true for crude oil prices. In the past two years, second-quarter crude prices have averaged above their first-quarter level by 6.7% and 8.8%, respectively.

In its report, EIA, the statistical and analytical wing of the Department of Energy, said it lowered its crude price forecast in the coming months due to lower products prices caused by warm weather and ongoing hurricane recovery efforts. The new 4Q 2005 forecast for U.S. benchmark West Texas Intermediate is a fix on an overstated projection last month. The revision puts crude in this quarter at $60.19 a barrel, compared with $60 so far in the quarter. That’s down from last month’s projection of $63.09.

But while EIA lowered the actual numbers in its near-term crude price forecast, it increased the rate of expected price rise in percentage terms. Last month, EIA had projected 1Q 2006 prices would gain by 1.4% from the 4Q 2005 price, but would dip by 0.4% in the 2Q 2006, to $63.75, or 25 cents below the 1Q level.
Now, EIA forecasts, 1Q 2006 crude will rise by 3.7% from the 4Q level, to an average of $62.42, and will rise by a further 0.9% in 2Q, to $63 - the highest quarterly price since the record high 3Q 2005 level of $63.19.
The expectation of higher 2Q oil prices comes even as global oil demand is expected to drop by 1.75% from 1Q and demand in the U.S. - the world’s largest oil market - accounting for 25% of global demand - will slip by 0.3%. Those projected rates of decline are just slightly down from the year-ago level.

EIA projects OPEC’s output will drop to 29.6 million barrels a day in 1Q and 2Q 2006 from 30.2 million b/d in the current quarter. So far, though, some members of OPEC, which meets Dec. 12 in Kuwait have given preliminary signs that they’ll keep output policy unchanged.

Only a steep slide in crude prices would force OPEC to change tack, and that doesn’t appear to be in the cards now. Not just because EIA is projecting gains - with 2006 crude expected to average a record high $63.33, up from $56.54 this year - but because oil futures markets continue to place a premium on forward contracts. That’s because despite all of OPEC’s manueverings, the cushion of spare oil output capacity won’t rise much and demand growth will continue next year.

And the world won’t be any less dangerous a place.

While no one - but perhaps for Saddam and his attorneys - is predicting the former leader will beat the charges, there hasn’t been much talk of the possibility, save for an item on the Web’s Drudge Report which said the White House has a plan to deal with that outcome. A ‘’top Bush source'’ was quoted as saying that more charges would be filed, and still more, if Saddam is acquitted on the current case. Prosecutors reportedly will present a videotape of Saddam issuing assassination orders. Restraint and jurisprudence will be the best weapons for the prosecution. Though it wasn’t a criminal trial, the nagging reminders of Kuwait’s over-reaching campaign to win U.S. military action to push Saddam out of Kuwait in 1991 come to mind.

Back then, Kuwait hired a powerful U.S. PR firm to help present its case, which included graphic claims of widespread episodes of babies being ripped from incubators in Iraqi hospitals. It later turned out that a witness, testifying before Congress in secret to protect her identity, was actually the 15-year-old daughter of Kuwait’s then-U.S. ambassador, Sheikh Saud Nasser Al-Sabah (later its oil minister), and the events described were hyped. For justice to be done that will stand the test of history, not just hurriedly end an historical chapter for political purposes, only the unvarnished truth will produce a fair trial - and a fair verdict.

The story attempts to unwrap the enigma in the sand, but falls far short for one crucial reason: It doesn’t address the Saudi view of appropriate oil prices.

Saudi Arabia’s thinking has evolved over the years since it was ‘’swing producer'’ more than 20 years ago. Back then, it would single-handedly take on the burden of cutting back output deeply to try to artifically support prices. Trouble was, their OPEC brethren - and major non-OPEC players - were boosting output and raking in more revenue at the expense of the Saudis. Since then, even if it’s just a cosmetic move, the Saudis have insisted that all of OPEC (and at times some non-OPEC fellow travelers) cut output when prices are under severe pressure.

What’s crucial about the recent market situation is that the Saudis have noticed that steadily rising oil prices over the past few years haven’t hurt the world economy or significantly lessened oil demand. And the world’s biggest oil producer and consumer, the U.S., hasn’t pressured the Saudis to see it any differently.

What the Saudis see as the appropriate price for oil - and how low prices would go before they would cut output is the crucial question for the global economy. Some hints may be forthcoming at the Dec. 12 OPEC meeting in Kuwait, but don’t hold your breath. Oil Minister Ali Naimi likely will resist talking about appropriate prices while the market is strong heading into winter.

Naimi recently declared the market situation as ‘’beautiful,'’ applying the one true rule of OPEC. Whenever a minister comments on the status quo - the status quo immediately changes in reaction to the comments. In this case, Naimi’s apparent content was a reason to push prices up by $2-$3 a barrel.

With little incremental output capacity coming on line for the next couple of years, oil prices are likely to be underpinned around current high levels. But the Saudis seem fine with that. Much will depend on how much the Saudis and the rest of OPEC trim output when demand hits seasonal ebbs. The Saudis, ensconced as price-takers, rather than price-makers, in recent years are likely to take a cautious approach, allowing stocks to build modestly, while avoiding a price collapse.
At times, the Saudis and their secretive ways seem to be their own worst enemy from a political perspective. And the kingdom’s refusal so far to clarify their market aims only adds fuel to the fire of the vocal minority of analysts who claim Saudi output is nearing its peak.

Saudi output restraint and capacity investment restraint in recent years has been based solely on political decisions - not the conditions of oil reservoirs. And so far, the world economy has proved them right.

Veteran Colorado State University hurricane forecaster William Gray predicts 2006 will be active, but not as severe at this past season, which damaged oil and gas producing and processing facilities along the Gulf Coast. Gray, who has been making predictions for 22 years, gives the following rundown for next season: 17 named storms, 9 hurricanes and 5 intense hurricanes. That compares with the record 26 named storms, 14 hurricanes and 7 major hurricanes this past season.

News of Gray’s forecast is here, while would-be weathermen who want the technical assessment straight from the source can find the original report here.

For the Gulf Coast oil region, Gray’s nutshell forecast is: likelihood of tropical storm 74% (vs 59% over the past 100 years); likelihood of category 1-2 hurricane 61% (vs 42%); likelihood of category 3-4-5 storm 47% (vs 30%); likelihood of all hurricanes 79% (vs 61%); likelihood of named storm 95% (vs 83%).

It’s worth noting, too, that the professor’s forecasts for the past three years have underestimated the extent of the hurricane season. For 2005, Gray forecast 11 named storms, 6 hurricanes and 3 intense hurricanes.

Exxon confirmed that its subsidiary, ExxonMobil Libya Ltd., has signed an exploration and production sharing agreement, or EPSA, with Libya’s National Oil Corp. to begin exploration offshore Libya.

The agreement covers the large Cyrenaica Basin Contract Area 44, which was awarded in the second round of EPSA IV licensing in October. The contract area comprises 2.5 million acres and is located offshore in water depths ranging from 10 to more than 10,000 feet.

“We are pleased to be back in business in Libya with our success in the second licensing round,” said Phil Goss, President and General Manager of ExxonMobil Libya. “In the past we worked closely with our Libyan partners to achieve many firsts in the Libyan petroleum industry, such as discovering and producing the first Libyan oil field, shipping the first oil to market and building the Marsa El Brega facility including the LNG plant. We look forward to working with the NOC and Libyan government to achieve great successes in Libya once again.”

In 2003, U.N. sanctions were lifted on Libya and in 2004, the U.S. lifted sanctions. U.S. crude imports from Libya, resuming for the first time since 1980, averaged 18,000 barrels a day in 2004 and in the first nine months of 2005 have averaged 43,000 b/d, according to the Energy Information Administration.

Typically, OPEC holds its winter meeting in Vienna, where the group established its secretariat 40 years ago. TV pictures beamed back to trading desks, of ministers clad in bulky coats and reporters scurrying among snowflakes, may add a psychological boost to prices. More than one minister over the years has emerged from his Mercedes, turned his collar up to a hawkish wind and had his declaration that frigid temperatures are good for demand flashed instantly around the world.

But what is the market to read into the venue for next week’s talks?

OPEC returns to Kuwait for the first time since 1973, a meeting at which the group set a fixed selling price of $5.12 a barrel. And, as OPEC’s official history tells it: “It was the first move by Member Countries to exercise their sovereign right to determine the price of their natural resources. From this point on, OPEC assumed the power to consider and set prices unilaterally for its oil.'’ Two months later, OPEC doubled prices to $11.651/bbl.

The rise of the futures market and non-OPEC competition have taken away OPEC’s unilateral power, but it still has considerable clout.

Rather than shiver from the Vienna cold, though, ministers are likely to sweat through temperatures near 90 degrees Fahrenheit in Kuwait.

Potentially the most onimous sign is the gathering’s status as the first winter meeting in an OPEC member country since 1997’s disastrous Jakarta talks. Back then, Saudi Arabia pushed OPEC into a 2 million-barrels-a-day rise in output quotas that was poorly timed with the start of the Asian economic crisis and an unusually warm El Nino winter in the Northern Hemisphere. Crude prices fell 16% in the months after the meeting, the start of a free fall that took more than a year to correct.

Still, recent history suggests there’s little OPEC can do next week to keep prices from rising. In the past six years (whether the group met in Vienna or non-member Egypt), oil prices have averaged 1% to 15.2% higher in the three months after the meeting than in the month in which the winter meeting was held. That translates to $60 to $68.25 in the first quarter of 2006.

Fast forward to a buoyant Chavez, claiming a greater mandate in a parliamentary vote boycotted by rivals, and some very curious doings by the man who dreamed of stardom in the Bronx.

While Chavez grew up with aspirations of playing baseball in Yankee Stadium, his latest endeavor is to provide low-cost heating oil to residents of the New York borough. Plans are set to be announced Tuesday, when the city may be under several inches of snow, and follow a similar offer of 12 million gallons of discount heating oil in Boston last week. Venezuela, which owns Citgo, the huge U.S. fuel retailer, offered the oil as prices soared in the wake of Gulf Coast hurricanes.

What Chavez wants to accomplish from the move - apart from burnishing his image with some in Washington even as he falls further out of favor with the Bush administration - isn’t clear. But the move is certain to make him more of a thorn in the side of the White House. Chavez has flat out accused Bush of plotting to overthrow him and said the U.S. was behind the election boycott. His relations with Cuba’s Fidel Castro and his support for Iraq’s Saddam Hussein, despite global sanctions, rankled the White House. While oil exports have stablized at normal levels and Caracas ranks reliably as the U.S.’s fourth-biggest source of crude, the feud grows. It came to a head last month at the Americas summit in Argentina when Chavez, a former paratrooper who once tried to seize power in a coup, claimed credit for sinking a regional free trade agreement sought by Washington.

Now Chavez is being viewed favorably in parts of the U.S. where he’s scarcely been heard of.
Maine’s Gov. John E. Baldacci, a Democrat, is trying to rally other Northeastern governors to press the Bush administration for more funding under a federal fuel subsidy program for low income residents known as LIHEAP. But so far more funds haven’t been forthcoming, and Maine, too, is in talks with the Venezuelans.

‘’If we only imported oil from the countries whose politics we agreed with, we’d be very cold and we’d probably have to go back to the horse and buggy,'’ said Beth Nagusky, the Maine governor’s top aide on energy matters.

While cold temperatures are just now arriving in the Northeast, the Energy Department shows residential heating oil prices have dropped by 9.4% in the region in the past nine weeks. Residential heating oil prices in the first week of October are the high for the season so far. In eight of the past 15 years, the first week in October registered the lowest price in the heating season.

The key: how will commodity funds - with significant short positions - align themselves heading into the new year. Oil analyst Kevin Norrish and others at Barclays Capitaltell investors Monday:

Speculators have historically never held such substantial short positions in commodity markets. Aggregate net length across the major US commodity futures markets rose again to a fresh all-time high last week of almost 975,000 lots. These short positions are concentrated in energy and grain markets where funds are net short, but there are also significant gross short positions in copper and gold. Given the improving economic outlook for 2006 and the strong fundamentals in many sectors, we suspect that year-end short covering could add additional upside price risk for many commodities over the next few weeks.

Barclays said ‘’increasingly positive demand picture for US gasoline'’ also suggests more short-covering. US benchmark WTI crude expected to average $62.60 in 4Q ‘05, slipping to $58 in 1Q ‘06 before gaining to $62.1 in 2Q ‘06.

While Saudi Arabia, its Gulf neigbhors and fellow OPEC members have pledged to boost investment in the U.S. oil refining network, after oil prices shot up above $70 a barrel due to tight petroleum products supplies, no concrete plans have yet emerged. In fact, Kuwait, following the Saudis last week, plans to boost its presence in China, where rampant growth in oil demand has underpinned the near-term forecast for oil prices.
Investors from Dubai recently announced they’re putting their petrodollars into the regal Essex House hotel in New York City. Despite the prime location in the heart of the world’s largest heating oil market, there’s no word that the $50 million renovation will include an oil refinery.

Some others in the hunt for petrodollars have been rounded up at
Roubini Global Economics.

But, as ever with Iraq, just as the oil bubbles slightly below the surface, so does the truth. It’s a fact that oil revenues are expected to reach $23 billion this year, compared with $17.5 billion a year ago. ‘’The budgetary position in 2005 has improved substantially,'’ the report said.

The trouble is that while Iraq is joyous about at 31.4% rise in revenue, global oil prices are rising this year at a rate of 36.5%. That’s a substantial difference in what Iraq should be earning if the oil industry was approaching anything close to normal. As Dow Jones Newswires reports:

‘’The report, called ‘’Iraq, as a Democracy: Progress and Challenges,'’ didn’t refer to losses incurred by the Iraqi oil sector due to sabotage of Iraq’s oil infrastructure.'’

According to the oil ministry, Iraq has lost around $11.35 billion in damages to oil facilities, cost of repairs, and lost export revenues in the time since exports resumed after the war and the end of May 2005. The report, from the prime minister’s office claims Iraq’s oil output is near pre-war levels at 2.3 million barrels a day, but oil officials and analysts put it near 2 million b/d. Exports are claimed to be 1.7 million b/d, but are reported by oil officials at only 1.4 million b/d.

Iraq has been consistently missing oil output and export targets, despite optimistic projections. The tone for such optimism was set by U.S. Vice President Dick Cheney, who famously told a journalism convention in April 2003 - just weeks after the start of the war - that he expected Iraq to be pumping “back up on the order of two-a-half, three million barrels a day within - hopefully by the end of year.'’

Elsewhere, a top Iraqi official took exception to U.S. claims about the potency of Iraq’s security forces.
A further report contends there has been a 70% decline in insurgent attacks.

Bottom line, with oil as with security, which go hand in hand: Iraq ‘’has a long way to go.'’