Saudis cut oil output

Saudis Slash Oil Output, Say Market Oversupplied:

Saudi Arabia's oil minister said on Sunday the kingdom had slashed output by 800,000 barrels per day in March due to oversupply, sending the strongest signal yet that OPEC will not act to quell soaring prices.

Consumers have urged the exporters' group to pump more crude to put a cap on oil, which surged to more than $127 a barrel this month, its highest level in 2 1/2 years amid unrest in North Africa and the Middle East.

Oil Ministers from Kuwait and the United Arab Emirates echoed Saudi Arabia's Ali al-Naimi's concerns about oversupply and said rocketing crude prices were out of the hands of OPEC, which next meets in June.

"The market is overbalanced ... Our production in February was 9.125 million barrels per day (bpd), in March it was 8.292 million bpd. In April we don't know yet, probably a little higher than March. The reason I gave you these numbers is to show you that the market is oversupplied," Naimi told reporters.

This is probably true. Surely no one in the world better analyzes the world oil market better than the Saudis. Oil prices have skyrocketed in the past several months. Most of us probably attribute the rise to unrest in the Middle East, but that is the minority cause. But early this month I covered that:

... the unrest does not account for nearly as much of the price increase as you might think. After all, supplies from the Middle East have remained almost entirely uninterrupted. Egypt's hardly burbled and Libya's disruption accounted for such a tiny proportion of world supply that its effect was marginal. IMO, the oil futures market, which is an aggregated risk assessor, has already discounted the possibility of future unrest regarding supply.

No, it seems the real reason oil prices have risen so much is because we, the American people, gave hundreds of billions of dollars to banks that then turned around and put our billions into investments in oil and other commodities funds rather than making loans to businesses. It all started with Ben Bernanke (no surprise)... .

The price of oil and of oil funds tanked today. US Oil (USO) dropped from Friday's close of 43.71 to a low today of 42.55 to close at 42.88, a one-day loss of 1.90 percent. Proshares Ultra DJ-UBS Crude Oil (UCO), plunged 3.70 percent from Friday's close of 59.66 to close today at 57.45 after reaching the day's low of 56.54.

USO, April 18:

UCO, April 18

One day does not a market make, but oil funds generally ended the day on the uptick.

My guess as to why oil dropped is that the market reacted to the Saudi announcement, but mainly because of this: U.S. credit rating outlook lowered by S&P.

NEW YORK (CNNMoney) -- Standard & Poor's lowered its outlook for the nation's long-term debt Monday, saying the political grousing over the deficit could put more pressure on the still shaky economic recovery.

"The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012," said S&P credit analyst Nikola Swann.

S&P maintained its top-tier 'AAA/A-1+' credit rating on U.S. sovereign debt, saying the nation's "highly diversified" economy and "effective monetary policies" have helped support growth. But the ratings agency lowered its outlook for America's long-term credit rating to "negative" from "stable."

Since oil is (for now) traded in US dollars, the S&P move blasted uncertainty into the market right at the time that the Saudis said they were cutting back. And if there is anything that futures markets hate, it's uncertainty. The initial impulse of investors is to sell, which as trhe graphs show, they did early. But then some sanity returned and prices crept back upward.

This is not to say that prices will rise again tomorrow. It's the long-term trend that matters most unless you're deliberately a short-term trader (and how do you like them ulcers, eh?). For people with oil funds (not commodity options) in their IRAs, for example, a price drop might be a good buy opportunity since the price outlook for crude oil remains rising over the longer term.

Yes, oil, will continue to rise in price - unless it doesn't: "Potential Black Swan: $10 Oil."

Mike Maloney of Gold and Silver Inc. ... said oil would go down to perhaps as low as $10 per barrel (which closely resembles our contention that deflation will cause prices of assets, commodities etc. to fall by 80-90%).

But back to the broader markets. Today, after tanking 250 points following S&P's announcement, the Dow recovered to close at -141 from Friday. So apparently the market does not believe that S&P is correct (they didn't shine in their evaluations of Japan, for example).

So what will the morrow bring? Sorry, my crystal ball is completely cloudy.

Okay, here's what I think: Gold and silver will fall some (they shot up like a rocket today as investors fled the dollar and oil) and oil and the overall market will rise, but not by a lot.