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The Next Price to Watch for After $100 Oil

Marianne Lavelle, U.S.News & World Report (blog)
Now that oil has closed at $100.01 a barrel, what is the next benchmark to watch for on the way to potential global energy crisis?

Well, the price of oil still has to rise about $1.70 more to surpass its all-time inflation-adjusted peak of $101.70, as calculated by the International Energy Agency. As we’ve noted here, there are a lot of different calculations for that all-time high, since the futures market in oil did not exist when oil hit its old apex in 1980.

Or, you could wait until oil hits $105, which was the original “superspike” prediction by Goldman Sachs analyst Arjun Murti back in March 2005, when oil was trading at about $55 a barrel. Murti said the world may have entered “a multiyear trading band of oil prices high enough to meaningfully reduce energy consumption and re-create a spare capacity cushion only after which will lower energy prices return.”

At the time, some analysts thought the market could reach such heights only if there were a major supply disruption from Saudi Arabia or Venezuela. Well, although there’s been saber-rattling by Hugo Chávez in Caracas, no one has turned off any spigots. But some of the same analysts now think the oil market is much more vulnerable. One is John Kilduff of futures broker Man Financial, who was quoted last fall as saying, “We’re only a headline of significance away from $100 oil.”

Apparently, it didn’t even take a headline of significance, just some further signs of the already evident fact that the Organization of Petroleum Exporting Countries was not concerned about high oil prices.

But if you want a longer benchmark to keep an eye on, look at “The Coming Triple-Digit Oil Prices” (.pdf) by petroleum economist Philip Verleger, published last fall in the International Economy magazine. Writing during the summer, when oil was in the $70s, Verleger noted six factors that would lead to higher oil prices: demand created by economic growth, underinvestment, nationalism in oil-exporting countries, investment uncertainty, disruptions from global conflicts, and issues of scale-“efforts to substitute away from hydrocarbons or to conserve will be hampered by the problem’s enormity.”

“Indeed, looking forward,” Verleger wrote, “it appears that triple-digit oil prices may become a regular feature of the global economy within three or four years, and soon the first digit may become something other than one.”

Marianne Lavelle, senior writer for U.S.News & World Report, has covered energy since California’s rolling blackouts and the simultaneous rise of two former oilmen to the White House.
(20 February 2008)
Links at original.

Pickens Expects Oil, Natural Gas Prices to Fall

Andrew Fishe, CNBC
After correctly predicting oil’s climb to more than $100 a barrel, legendary oilman Boone Pickens said Thursday he is shorting both the oil and natural gas markets in the belief that oil will stage a short-term pullback.

“I think oil’s going to back off,” he said, during an interview on “Squawk Box.” “The weakest quarter is the second quarter. We’ll drop $10 or $15 a barrel in the second quarter. I think we’ll be back above $100 in the second half of the year.”

“I think natural gas prices are unusually high now, and I think they’re going to back off, also,” he added.

When investors take a short position in an investment they are betting the value of the investment, be it a stock or a commodity, will fall. Short-sellers often borrow securities, then sell them, waiting for their value to fall so they can buy the asset at a lower price, return them to lender and pocket the difference in the prices.

In a wide-ranging interview, Pickens also declared some support for alternative energy, saying half a trillion dollars a year is going out of the country to buy oil.
(21 February 2008)
Related from Reuters: Pickens sees oil, natural gas prices falling

shawnott writes at TOD:
Did anyone else see Boone Pickens on CNBC this morning? He mainly seemed to speak about the need for wind and solar. He did mention a couple of times about supply at no more than 85 million barrels a day. What I thought was new for him was his talking about problem of high oil prices is the amount of money leaving the US instead of high oil prices being a signal of supply constraints. It just seemed like a shift in language to me. My perception was that he was alarmed about oil supplies going forward, was pushing renewables, thinks oil will hit $150, BUT tried wording it all in a way that didn’t make him sound like a doomer.

Pumped up

The Economist
Why the price of oil and other raw materials continues to rise despite the economic gloom

BANKERS and policymakers may be wringing their hands about the prospects for the world economy, but commodities traders, it seems, see no cause for concern. On Wednesday February 20th the oil price hit a new record of $101.32 a barrel. Soyabeans and platinum, among others, have also reached record prices in the past week. Vale, a Brazilian mining firm, has persuaded some steelmakers to pay as much as 71% more this year for its iron ore. Across the world the inflationary impact is tangible. In America consumer prices in January were up 4.3% on a year-over-year basis. Excluding food and energy, they were up 2.5%, well above the Federal Reserve’s comfort level.

Despite a few years of rising raw-materials prices, many traders remain bullish in part because of further bad news about supply. A shortage of electricity in South Africa, which has forced several big smelters to shut down, has helped cause platinum’s giddy ascent.

… Meanwhile, most analysts expect demand for raw materials to remain firm despite the gloomy economic news. Although Goldman Sachs, for one, expects oil consumption to fall in America, it also predicts that continued growth in booming spots such as China and India will underpin global demand.
(21 February 2008)

Libya’s Ghanem sees oil prices rising further

Oil prices are likely to keep rising but OPEC has no plan to increase production for now, the head of Libya’s National Oil Corporation, Shokri Ghanem, said on Thursday.

“I believe the oil price will continue rising and this is because of speculation and political issues,” Ghanem told Reuters in the Libyan capital Tripoli.

…Much further ahead, Ghanem said many oil exporting countries had reached the maximum of what they can produce and that many people were starting to be convinced by the theory of “peak oil”.
(21 February 2008)