Psst! Summit big’s going down on Sunday an’ the fall owt’s gonna be massive.

Last Monday oil played a blinder, givin’ it some all the way up to $140. Although this was blamed on slags selling the Dollar down it was givin’ people the right ‘ump.

Then some geezer says he knows where he can get ‘is ‘ands on a whole load of crude. Course, we fort he meant iffy DVDs, but he’s called a big meet to ‘ave a rabbit with all the top petrol heads.

Over the past few days there’s been more excitement in the oil market than at the Queen Vic on Christmas Day. The market with the rep’ for more rises than Russell Brand has suddenly taken a shine to going both ways. For the first time ever paddypowertraders clients traded more oil than FTSE, Dollar or indeed any other investment.

So, what the hell’s going on and why all the excitement about this Sunday?

But just in case you’re a newbie and think of oil as something you massage your wife with, check out a couple of earlier articles; the first one is a beginners’ guide:

A Cruder Way To Trade

Big, Black And Everyone Wants Some

Let’s ‘Av A Meet An’ Get It Sorted
Saudi Arabia, the world’s biggest oil producer, has arranged a little get together for this Sunday. Unlike the rest of us, it’s not going to be beer and pizzas and cheering on Italy verses Spain. The meeting will be attended by energy ministers from the producing nations as well as representatives from oil importing countries, including President Bush and Gordon Brown. If these guys are giving up their Sunday it shows how significant this meeting is. Oh and a few banks have also been invited, just to give everyone a laugh.

Wotz Their Game Then?
Until recently Saudi Arabia had been firmly of the view that there was plenty of supply and that octane-fuelled price rises were down to speculators. The oil-producing states wanted to conserve some of their oil riches for future generations. But as prices continued to rise, the pragmatists feared that future generations would grow up in a whole new world. Windmills would power factories and cars would run on potato juice. It would be better to help lower prices now, rather than drive away the customers of the future.

Someone’s Givin’ It LARGE!
So what are the Saudis offering? Good question, and at the moment the answer is a moving target. There’re a lot of numbers being thrown about but here’s an idea of what may or may not be on offer:

Last week the State-owned Saudi Aramco said that it would start pumping oil from its new Khursaniyah field within the month. Now the word on the street is that this new field is good for 500,000 barrels per day. That’s about 5% of Saudi’s current daily output.

Traders are reckoning on an increase of anywhere between 200,000 and 750,000 barrels per day. However, according to a UN spokesman, King Abdullah of Saudi Arabia told the United Nations Secretary-General that they would increase production by 200,000 barrels a day from July.

Officially, it seems that Saudi Arabia produces 9.45 million barrels a day at the moment. That’s already 300,000 higher than last month. Word from the United Nations is that production will be increased to 9.7 million barrels a day. That will be the highest level since 1981.

I guess a lack of certainty over future production levels shows why the market has been so jumpy, with no discernible pattern. And also, like one of Gordon Brown’s Budget’s, the devil will be in the detail. Just like Mr Brown, the Saudis have a history of using smoke and mirrors. Previously they’ve announced output rises, which were already being used in their role as “swing producer”. The role of “swing producer” (No, nothing to do with wild, camel swapping parties) is to smooth OPEC’s overall production by cutting or increasing Saudi’s own bpd to stabilize prices against supply disruptions in other countries.

Another Dodgy Deal
Check out this chart:

Data taken from BP’s Strategic Review

See if you can spot the country that’s cut back on production most. From March 2006 until April 2007 the Saudis cut production from 9.56m barrels a day to 8.53m b/d, leading to six consecutive quarters of inventory reductions.

You’re Dealin’ On My Manor.
The only loud dissenting voice so far has come from Iran. In fairness what they’re objecting to is plans for Saudi Arabia to raise output without prior consultation with other OPEC members.

An Another Fing
Paradoxically, an increase in Saudi production now increases the risk factor in the future. As the “swing producer” Saudi can up production to cushion disruptions elsewhere (see below). But depending on the size of any increase now that leaves less of a cushion for future events.

Talking of disruption, there’s a strong likelihood of a strike in Nigeria. There’ve been all sorts of headlines today; the strike’s off (for now), but there’s been a bomb attack. The one certainty is that there’s a whole load of geo-political disruption. The Israelis are long of oil spread bets and can increase their profit just by hinting at attacks on Iran. If the strike in Nigeria goes ahead it will threaten (cut) 350,000 barrels per day. If Israel goes to war, I’m buying shares in Halfords the bike sellers.

Down The Market
OK, so that’s the background; this is where we get to make our money.

What comes out of Sunday’s meeting will reach far wider than just the oil market. If the Saudis bottle it and don’t come up with the goods I reckon oil will rocket to a new high. A Gordon Brown fudge will be treated with contempt and the rising price of oil (and its effect on inflation and interest rates) could be the final nail in the coffin of a few economies.

A rise in the oil price could also see the Dollar collapse, just after the Fed had publicly decided that they were in favour of a strong Dollar.

Equities are already weak at the knees with traders looking for an excuse to test new lows.

The oil chart isn’t telling me a lot at the moment; sure, recently it’s been bobbing around like Jordan doing her equestrian event, but it’s far too soon to call a reversal. Currently the price is only $2 off the record high.

To complicate matters this week has been expiry week for the July futures (these contracts are weird and expire a month ahead of the contract name). This always adds to extra volatility as traders scramble to close, or rollover, positions. If traders have been net long then the price will fall, if they’re short then vice versa.

Strong action by the Saudis might be enough to persuade some speculators to move on to the next party, and yes at some point the bubble will burst. But it takes a braver man than me to short oil.

So I’ll be up bright and early on Monday morning, and it won’t be for the start of Wimbledon. I don’t know when we’ll get the facts, but I’ll be sitting there with charts up for oil, FTSE and GBPUSD, watching for any movement. I’m not looking to trade the rumours; I’d rather miss a bit and trade the facts when we know them. I’m more likely to play the move through the Dollar or FTSE than the oil market, but whatever I trade I’ll be using tight stops in what promises to be an excitable market.

A Great Way To Finish
And here’s the stunning ‘PS’. Hitting the wires last night George Bush said that he doesn’t expect any announcement of an increase in production at Sunday’s meeting.

Now that could just be because he’s George Bush, and he doesn’t know what meeting it is or whether it’s in Iraq, Iran or another small island off the US. Or it could be because the rise has already been announced.

Or it could be that the Saudis have got cold feet and the BBC wants them to sign a new contract before writing the next episode of Middle-Eastenders.

But here’s a bit of good news to end on.