IBD: Oil Could Soar Past $100 On Demand, Some Argue



Posted 7/13/2007

Crude oil prices soared to 11-month highs Friday on a new forecast that global oil demand will accelerate next year as supply remains tight.

The pain at the pump may be only beginning, if some of the more dire predictions about future energy prices come to pass.

U.S. crude futures jumped $1.43 to $73.93 a barrel after the International Energy Agency said global oil demand growth in 2008 will be the strongest in years. The IEA did say that higher production and refinery capacity should ease supply concerns somewhat.

A supply shortfall could herald further increases in oil prices, though experts appear divided on how much higher they can go. Some said a spike in prices would derail economic growth, while others said significant price increases can be sustained.

“My line right now is that we’re headed to triple-digit oil prices within three or four years and the first digit is not going to be a 1,” said Philip Verleger, an economist who heads energy consultancy PK Verleger LLC.

He cited “huge” pent-up demand in China and the rest of Asia, lack of growth in production capacity and reduced investment in refineries amid local resistance to new sites, and worries about measures to fight global warming.

“We’ve created a situation where prices are going to go up a lot,” said Verleger, a respected forecaster.

Others were skeptical of the IEA’s estimates and predictions of a big run-up in oil prices.

“I don’t think demand is going to grow as fast as they (IEA) think it’s going to grow,” said Francisco Blanch, head of global commodities research at Merrill Lynch.

“I can see pent-up demand from the emerging markets but I don’t think they’ll be able to cope with structural upward shifts” in prices of the size seen in the past few years, he added. “If it does happen we’ll go into a recession.”

So far, spiking oil prices haven’t triggered a recession, as some have feared. The U.S. has been sluggish over the past year, but the outlook started to improve in the spring.

Meanwhile, global growth accelerated for five straight years to 5.4% in 2006, the highest in at least 27 years, according to the International Monetary Fund. That’s despite oil prices doubling over that time.

Strong global growth is the reason why demand for oil and other commodities has soared in recent years.

“These high prices have had no impact on demand so far,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA. “It’s difficult to make a bearish case (for oil prices) at this time.”

Brent crude, seen as a better indicator of the global market, rose $1.17 to $77.57 a barrel, also an 11-month high.

Geopolitical tensions are another factor fueling oil prices, analysts said. They include Iran’s nuclear dispute and supply disruptions in Nigeria due to insurgent attacks.

Heavy-handed efforts by Venezuela and Russia to nationalize their oil industries and use crude as a political tool have also raised supply concerns.

Consuming countries have urged the Organization of Oil Exporting Countries to boost output to lower prices. But OPEC has refused, saying supplies are sufficient.

In the near-term, some analysts expect oil and gas prices to decline as the summer driving season ends in the U.S., the world’s biggest consumer.

“As we get closer to the end of the driving season, barring hurricane risk, we’re likely to see prices fall back below $60 by the end of the year,” said Jason Schenker, an economist at Wachovia.


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