San Diego Union-Tribune: $50 or $100? Experts mull next big oil milestone

By Matthew Robinson
REUTERS

11:07 a.m. September 19, 2007

NEW YORK – With oil storming to new highs over $80 a barrel this week, energy experts are divided over whether prices will crash back to $50 before they break $100.

Expectations that global supplies will struggle to keep pace with demand as the Northern Hemisphere gears up for the winter cold, and worries over potential hurricane disruptions, have sent oil to new peaks over the past six trading sessions.

But analysts are debating whether oil prices have much upside left after quadrupling since 2002, with bulls arguing that strong economic growth means a supply squeeze is imminent and bears saying a seasonal demand drop will deflate prices.

“The trend is up, and if your supplies are 85 million barrels per day (bpd) globally, and you look at what demand is predicted to be for the fourth quarter, it is 88 million bpd,” Texas oilman and investor T. Boone Pickens said.

“I don’t think you’ll hit $100 this year unless you have some kind of geopolitical event that causes that to happen, but you’re going to get to $100 at some point.”

U.S. oil climbed to a fresh high of $82.51 a barrel on Wednesday after a fourth drop in weekly U.S. crude inventories reignited supply fears and the Federal Reserve’s aggressive interest rate cut raised expectations of continued strong demand.

“On a pure fundamentals basis the oil market is likely to see $100 long before it again sees $50, whether from a weather- or a politically engendered spike or a ratcheting up from supply versus demand fundamentals,” said Edward L. Morse, Chief Energy Economist for Lehman Brothers.

“The market has for the time being a floor price that is in the $60 range because of falling spare capacity, higher finding and development costs, the weaker dollar and OPEC objectives.”

U.S. crude stocks have tumbled over the past month to 13 million barrels below year-ago levels as refiners in the top-consuming nation brought units back online following a string of accidents earlier this year.

BEARISH BREAK?

The resulting surge in prices prompted producer group OPEC to agree to ramp up output by 500,000 barrels per day (bpd) last week, partly erasing a 1.7 million bpd cut agreed last year. An OPEC source on Tuesday said the cartel could increase output again if prices hold over $80.

In addition, several oil analysts said a seasonal decline of fuel consumption in autumn – when gasoline consumption eases and heating oil use has yet to kick in – would help build inventories and push prices back down.

“I’m not buying into $100 oil, not in the short term. I think we’re going into turnarounds (refinery maintenance) now, so demand for crude oil will begin to fall over the next month and a half,” said Stephen Schork of the Schork Report.

“We should see an increase in the days of forward cover.”

Some analysts argue the drop in crude stocks does not justify the current price, saying the shortage is coming from the oil products side where refinery problems have caused a drawdown in fuel stocks such as heating oil.

“Demand for oil remains strong globally, but supplies are coming onto the market,” said Mark Routt, analyst for Energy Security Analysis Inc (ESAI).

The heads of two of the world’s biggest oil companies, Exxon Mobil Corp and Royal Dutch Shell Plc, agreed fundamentals do not support current prices.

“When you look at crude oil inventories they are 1.5 percent less than a year ago when we were basically at a $60 a barrel level,” said Tim Evans of Citigroup Futures Research. ”My idea is that $65 is pretty fair value.”

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