The Wall Street Journal: In Crude’s Sights: $101.70

The Real Record High for Oil
By GREGORY MEYER
November 5, 2007; Page C6

After the price of oil edged further into record territory, the $100-a-barrel bears and bulls are poised for a showdown.

If the uptrend continues, market watchers say this could be the week that oil manages to punch through the symbolic level and eclipse the inflation-adjusted record of $101.70 reached in April 1980.

But some observers are dubious as to how long crude prices might stay there.

Benchmark crude futures have jumped 27% in the past three months on concerns of global-supply shortfalls, strong demand and a flood of investment from financial firms and speculative investors. The front-month December crude contract on the New York Mercantile Exchange settled at $95.93 a barrel Friday, an all-time nominal high.
 
“The market doesn’t seem to have done anything on the downside to threaten the uptrend,” said Tom Bentz, senior analyst at brokerage firm BNP Paribas Commodity Futures in New York. “As long it continues to hang in there like this, traders will continue to target higher levels.”

But the steep rise by crude-oil futures could be a setup for an equally dramatic fall, some market watchers say. “The bottom line is people are keying on this geopolitical tension and speculators are running the market higher,” said Mark Waggoner, president of Excel Futures, a commodities broker in Huntington Beach, Calif. “We probably are headed to a hundred bucks, but I would expect a violent correction very soon.”

Potentially chilling the rally are investors with long positions — essentially bets that oil prices will move higher — who see $100 as a finish line and not a new floor.

Peter Beutel, president of New Canaan, Conn., energy-risk advisory firm Cameron Hanover, expects oil prices to at least clear $98.50 and may reach $100. But that may form more of a peak than a plateau as traders ditch their long positions.

“I’m not as worried about new selling coming in and ending the bull market,” he said. “I’m more worried about all the longs deciding at once that the market has gone as far as it can.”

A large cluster of options held to buy crude at $100 a barrel could continue to act as a pull on prices toward that level, as big traders seek to push futures prices to the point where their options become profitable.

Last week’s rally took flight Wednesday after the U.S. Energy Information Administration reported big drops in crude inventories nationally and at Cushing, Okla., the delivery point for Nymex oil contracts. This week analysts say they will be watching inventories closely.

A decline in stocks at Cushing or nationally, “regardless of the magnitude, will be enough to keep this bull alive,” said Jim Ritterbusch, president of oil advisory firm Ritterbusch & Associates in Galena, Ill.

The prospect of a Turkish incursion into Iraq to attack members of the Kurdistan Workers’ Party, or PKK, has also weighed on crude prices in recent weeks.

–Matt Chambers contributed to this article.

Write to Gregory Meyer at [email protected]

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