Sunday, January 9, 2011

"Oil prices are exploding -- but for how long?"

From Foreign Policy's The Oil and the Glory blog:
Fatih Birol, chief economist for the International Energy Agency, is among the most respected voices in energy. When he speaks, he can even get the OPEC folks to listen. So it is notable that Birol has hit the panic button on oil prices, not-so-subtly suggesting that OPEC increase production -- and that oil-consuming  nations moderate their appetites. "Oil prices are entering a dangerous zone for the global economy," Birol's told Sylvia Pfeifer in today's Financial Times.

Translation: Oil prices approaching $100 a barrel could take the wheels off the just-recovering global economic cart. Oil traders are driving such talk by upping the number of bets on higher prices that they're making in the futures market, reports Bloomberg's Asjylyn Loder. At one point on Monday, Brent crude -- the variety benchmarked in Britain -- soared to $96.07 a barrel on such bets, its highest price since October 2008.

Birol can't be ignored, and recovering global demand has most analysts agreeing with him. Yet, as this blog did last month, let's also consider the less-excited voices.

Phil Flynn at PFGBest, for example, thinks that government stimulus spending over the last couple of years has pumped up oil prices by $15 to $20 a barrel. So while speculators are driving up prices in a frenzy to cash in, politics are working against them -- there isn't political support for sustained stimulus spending any longer, so Flynn expects that air to go out of the price this year. Another moderating factor, according to Flynn, is that a lot of investors piled onto oil as a shelter from tanking stocks and bonds; now they will go the other way. "Even with all the bullish mania that has gripped the [oil] complex in recent weeks, the 2011 outlook, while still bullish, is obviously not as wildly bullish as recent market action might have you believe," Flynn told clients today.

Then there is Barclays Capital. The FT reported yesterday that Barclays is forecasting oil hitting $100 a barrel this year. But the Dec. 30 Barclays report that the newspaper quotes goes on to suggest that its analysts don't expect oil to average $100, but only to touch that price -- namely because OPEC will step in with higher production...MORE