Conventional Wisdom Says Price of Oil Must Come Down – Here’s Why it Will Soon Trade Above $120 (& May Hit $150)
Submitted by EnergyTechStocks.com
Editor’s Note: In keeping with its policy to be solely a news source, this EnergyTechStocks.com story is intended for information purposes only.
Posted: March 17, 2008
A few weeks ago when the spot price of oil was around $95 a barrel, a very well-known trader told EnergyTechStocks.com that prices were about to drop, first to about $87 a barrel, then, after a pause, down to about $67 a barrel. When oil prices instead rose above $100 a barrel, EnergyTechStocks.com queried the trader about why he had been wrong. He has yet to respond.
This trader’s basic argument was that gasoline demand in the U.S. was going to fall because of the American recession, so that, with the world already sufficiently supplied with crude, prices inevitably were going to drop. This same basic argument continues to be heard on U.S. business TV channels, probably by some of the same analysts who, when polled by Reuters back in August 2006, responded that they expected crude to be at $56 a barrel in 2008.
Here’s the argument – based on market fundamentals, not on external factors such as a falling dollar and over-speculation – for why oil prices will keep going higher over the next several weeks, topping $120 and possibly hitting $150 a barrel.
As high as oil prices are right now, the percentage gain in the spot price of crude between January and March 2008 isn’t out of line with the percentage gains recorded between January and March in both 2007 and 2006 – and in both of those years crude prices kept rising over the next several months, hitting new record highs.
Despite pump prices having more than doubled in the U.S. since 2003, Americans have eased up on the gas pedal only slightly, and probably not even a major recession will cause a significant cutback in total number of miles driven. Americans put on most of their miles going to and from their jobs. No added amount of telecommuting, carpooling or riding the rails will be enough to cause a significant overall reduction in Americans’ total commutation mileage, at least not this year. It’s what economists call demand inelasticity.
In addition, as noted in a May 2006 New York Times article headlined “Why Prices at the Pump May Have Little Bite,” the fact is that “while the price of gasoline may be highly visible and symbolic, filling up the tank simply doesn’t eat up that much of most families’ budgets.” To be sure, low-income earners are and will continue suffering. But most American families’ budgets should be able to handle that annual pilgrimage known as the summer vacation.
Last week the International Energy Agency (IEA) effectively put in place a floor price of about $100 a barrel. The IEA did so when, despite lowering its 2008 forecast for oil demand in the U.S. and Europe, it said there will be little if any price relief because of the ongoing increase in demand from the emerging economic giants, China and India, plus subsidized gasoline prices in Middle Eastern and other countries that encourage high consumption.
In a nutshell, here’s why crude is going to top $120 a barrel. First, the new floor price of oil looks to be approximately $100 a barrel. Second, Americans probably will keep driving as or nearly as much as always. Third, a rise to $120 a barrel or higher wouldn’t be out of line with percentage gains posted the last two years.
If you also factor in how the market reacts whenever a hurricane is brewing, plus OPEC’s steadfast refusal to raise output, plus the fact that U.S. refineries should be (but aren’t yet) producing flat out because of lower year-over-year profit margins, you’ve got a recipe for much higher oil prices.
Will we one day look back fondly at $100 oil? Afraid so.
