Oil corrected modestly on Thursday when it was announced that China would raise state-controlled fuel prices by as much as 18% in an effort to reign in inflation. One might imagine a fair amount of demand kill in China as a result, and the oil market corrected lower on the news.

However, that dip was seen as a buying opportunity as analyst subsequently concluded that the hefty hike in fuel prices would actually have little impact on China's voracious appetite for crude.

The Chinese are developing quite a love relationship with their cars. Nothing says you've joined the rapidly expanding middle class like the purchase of an automobile.

Car ownership has grown by 300% in just the past six years and it is estimated that anywhere from 10,000 to 20,000 new cars hit the road in China each day.

That's a lot of cars, and quite a trend. The oil market seems to think that a double-digit hike in fuel prices is only going to have a limited impact on the rapidly developing car culture in China.

There has also been some speculation that the price hike was in reality merely an incentive to bring idle refining capacity online ahead of the Olympics.

In the eight months since the state last hiked fuel prices, the cost of crude oil surged over 50% on the global market. As margins dwindled and even inverted, refiners apparently scaled back production, leading to wide spread fuel shortages.

China is supremely concerned about how they are viewed by the rest of the world. The Olympics are essentially their coming-out party and a fuel shortage during that period simply won't do.

Royal Dutch Shell has halted production of 200,000 bbl/day in Nigerian crude. The stoppage equates to about 10% of total daily production from Nigeria and comes as a result of Thursday's militant attack on its Bonga offshore oil platform.

While the latest cut is most likely temporary, Nigerian oil production had already fallen by 20% in recent years due to ongoing militant attacks in the Niger Delta.

The Nigerian newspaper The Punch also reported yesterday that the Central Bank of Nigeria was considering a plan to diversify the oil-rich country's $61 bln in currency reserves into gold and other metals as a hedge against the weak dollar.

The market doesn't seem to be expecting any sort of great revelation out of this weekend's emergency OPEC meeting in Saudi Arabia. Of course the burning question is, exactly how much additional capacity do the OPEC nations have?

OPEC will undoubtedly maintain that there is adequate supply. If they truly believe that, there's not much incentive for them to increase output in any meaningful way, or they risk cratering the market. They are unquestionably enjoying the increased revenue resulting from $130+ oil, but they don't want to kill the proverbial goose.

Meanwhile here in the States the debate rages about offshore drilling and drilling in the Arctic National Wildlife Refuge (ANWR). Admittedly this is no short-term solution to the price at the pump, but could result in a measurable increase in domestic supplies down the road.

Arguably, if we had been a little more forward looking in years past, we might not be in this bind today.

It is likely that crude will continue to trend higher to the point where there is sufficient demand kill to spark a sustained correction. From what level might that correction come, $150, $175, $200? Your guess is as good as mine.

Any of those levels is a fair price as long as someone is willing to pay it. Despite all the grumbling about the oil market and speculators, a free and open market is the best way to determine fair value. As long as expectations are for higher oil prices, commercials are going to continue forward buying oil and the specs are going to jump on for the ride, which in turn adjusts price expectations even higher.

The gold/oil ratio has edged slightly higher in recent days, presently trading around 6.7. While it may be premature to call a bottom in the ratio, profit taking in oil ahead of the end of the quarter may ignite renewed interest in the yellow metal.

A rebound in the gold/oil ratio above 7.0 would be an encouraging signal, suggesting potential back toward 10.0. Over the last forty years the ratio has averaged around 15.0. Such a rebound would bode well for a move in gold back above $1,000.

One big wild card for oil and gold is the potential for a US and/or Israeli air strikes on Iran. Reports today suggested Israeli military maneuvers earlier in the month might have been a 'dry-run' in preparation for such an attack. If Israel does strike at Iran's nuclear facilities, the implications for both oil and gold are extremely bullish.

Thursday's close in the yellow metal above the 50-day moving average lends additional credence to the short-term bullish outlook. A challenge of the 100-day moving average at 916.01 is likely. Penetration would clear the way for a push to test chart/Fibonacci resistance at 935.30/938.85.

Gold Market Movers:

Canadian retail sales for Apr +0.6%.

German PPI surges to 6.0% y/y.

Israel shows abilities for Iran strike

Hong Kong bourse to introduce gold futures in October

SA gold output falls 10.1% yr/yr in April

Nigeria: Federal Government considers investment in gold, others