As oil strides from one record high to another, predictions of $100 a barrel crude no longer look far-fetched.
After prices shot to a record $68 a barrel on Thursday, analysts are increasingly inclined to accept that the stretched world market is in the throes of a ‘super spike’.
“There are no constraints on short-term prices. Speculators are driving oil and there’s nothing to stop it from going up. Supply and demand will be important factors in the long run, but they are not in the market’s eye at the moment,” said Geoff Pyne, energy consultant for Standard Bank.
Markets are vulnerable to any supply disruption, whatever the magnitude, with the Organisation of the Petroleum Exporting Countries pumping nearly flat out.
“There is such a little buffer of spare capacity. If we were to see a major production loss in the world, it could happen,” said Kevin Norrish at Barclays Capital.
Financial betting firms say once the price pierces $70 a barrel, they will open their books to wagers on $100 oil. With no loss in momentum to a rally that has doubled crude prices, the betting looks about to begin.
“We haven’t made a price yet, but we’ll certainly think about it when the price breaks $70. Thanks for the tip,” said a London bookmaker.
Investment bank Goldman Sachs ‘super spike’ report found limited support when it first appeared in March and US crude was trading around $54, but the possibility of oil surging as high as $105 has gained currency.
“I don’t know about the next quarter or even next year. But it will go over $100 a barrel, but I’ve no idea how long it’s going to take to reach there,” commodities guru Jim Rogers, a former business partner of billionaire fund manager George Soros, said last week.
As the world struggles to pump and refine enough crude oil to satisfy US gas guzzlers and voracious consumers in Asia, $70 oil may be but a few trading days away.
“I don’t think it’s crazy to think the price would spike up to $75. Most of us are resigned to the fact we may see prices equivalent to the highest in real terms,” said Deborah White, senior economist at SG Commodities.
That day may not be far off with prices well within reach of the inflation-adjusted $82 a barrel reached in 1980, the year after the Iranian revolution. US gasoline prices were about $3 a gallon then compared to current levels of about $2.60.
Goldman Sachs said earlier that US gasoline prices might need to exceed $4 a gallon, which implies crude at about $135 a barrel, before demand starts to erode. Other analysts agree.
“US motorists will moan about pump prices, but it will take weeks or months before we see a considerable impact on demand. High crude prices so far have not slowed economic growth appreciably, and they’re only beginning to affect oil demand at the margin,” said Pyne.
But others argue that high oil prices are starting to dent consumption, leaving little scope for a sustained period of prices above $70.
Strong US inflation and an earnings warning from the world’s biggest retailer Wal-Mart last week highlighted market concerns that soaring crude prices were beginning to take an economic toll. “None of the analysis we’ve done on fundamentals would support a $100 price, certainly not on a sustainable basis. High prices are quite clearly having an affect on demand growth and we expect it to ease further next year,” said Julian Lee of the Centre for Global Energy Studies.
A Reuters poll of industry analysts this week showed the mean average of oil price forecasts for 2006 rising above $50 for the first time.
The findings of the survey of 28 analysts forecast US crude averaging $50.49 a barrel in 2006, with Goldman having the highest forecast of $68.