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THE WALL STREET JOURNAL: To $100: Crude’s Slippery Slope

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THE WALL STREET JOURNAL: To $100: Crude’s Slippery Slope

As Oil Nears the Mark,
Its Stay There, if Any,
May Be Short-Lived
By GREGORY MEYER
February 19, 2008; Page C5

Oil prices appear to be one event away from again visiting triple-digit territory.

But even if oil futures recross the $100 mark breached in early January, many market watchers say prices won’t stay that high for long, arguing that oil’s rally from a recent settlement low of $87.14 a barrel on Feb. 6 to $95.50 on Friday was driven as much by technical factors as any new arithmetic of supply and demand.
 
In fact, last week, three of the main energy-forecasting bodies dropped their growth outlooks for oil consumption for 2008. The U.S. Energy Information Administration said world consumption will now grow by 1.4 million barrels a day, 200,000 barrels fewer than its previous forecast, “due to increased risks of a global economic slowdown.” That was followed by cuts in forecasts by the International Energy Agency and the Organization of Petroleum Exporting Countries.

Until recently, projections of soft demand have sent a negative signal to the markets, pressuring the price of crude. But those concerns have been overpowered by developments on the supply front, including a Venezuelan pledge to stop selling crude to Exxon Mobil Corp. because of a legal tiff related to a nationalized oil venture.

Still, even skeptics of the buying spree in crude say reaching $100 again is plausible. “The market seems to be inclined to leave no stone unturned,” said Tim Evans, an energy analyst at Citigroup in New York who sees a longer-term price in the low $70-a-barrel range. “We’ve climbed this high. There’s not necessarily any reason why it can’t trade at $100. It doesn’t take that much additional buying to get us there.”

Market watchers say oil prices have found strong support above $85 a barrel, which keeps the notion of $100 oil alive. At the same time, Mr. Evans said, “I think the market is fundamentally weaker than it was at the beginning of January when we last tried to pop through $100. The window of opportunity for testing the upside is basically closing.”

Crude oil on the New York Mercantile Exchange touched an intraday peak of $100.09 a barrel on Jan. 3.

Mr. Evans cites as evidence the five straight weekly increases in crude-oil stockpiles in the U.S., the world’s largest energy consumer, and the reconsidered forecasts of demand.

Some analysts question the extent to which oil prices can continue to move higher against a backdrop of weak U.S. economic activity — and possibly even a recession. Signs of weaker demand have already trickled into gasoline consumption across the country.

The wild card for oil prices will be OPEC, whose 13 member nations pump four of every 10 barrels of oil the world consumes. The cartel meets on March 5 in Vienna to review production policy and hinted in its February oil report that it may be more inclined to curtail production amid softer demand and increases in U.S. and European crude and gasoline inventories.

OPEC members face an unpalatable choice: If the price of a barrel of oil stays in the mid-$90s and the group confirms current production levels, it could hasten any downward price swing when world demand takes its annual breather in the second quarter. But if the group cuts output in response to faltering demand, that could keep prices aloft, potentially exacerbating an economic slowdown in key consumer nations.

Adam Sieminski, Deutsche Bank’s chief energy economist, says OPEC is likely to try to keep prices within a band of $85 to $95 a barrel. “If we’re between $95 and $100, they’re not going to be cutting production,” he said. “If we’re under $90, they’ll think about it. If it looks like we’re headed towards $80, they’ll definitely cut.”

Write to Gregory Meyer at [email protected]

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