Why Oil Could Be Headed Even Higher

Surging demand coupled with concerns about tight supplies are sending crude prices up, and there’s no relief in sight on either side. In addition, speculators are now betting on further price spikes. “It looks like [oil] is getting ready to do a new leg of height,” says Peter Beutel, president of the energy risk management firm Cameron Hanover. “There is market momentum, and the magic number now is $81. If we hit that, most people believe it’ll head to $91 or higher.” Beutel adds that some technical charts predict prices could hit $110 or $118 by the end of the year. He adds however that such a spike would take a “smoking gun” like Iran blockading the Strait of Hormuz, the key strategic gateway to the Middle East’s oil supply.
Unlike in previous periods, the main driver in the recent price boost is not a war, a hurricane, or the machinations of OPEC, but rather robust global economic growth, say analysts. The U.S. economy has remained solid, despite jitters in the stock market. China and India are surging, while most of Europe is strong.

Even as high oil prices are a symptom of a strong economy, however, they could ultimately put the brakes on economic growth. The darker side of the growth issue is that the price spikes caused by competition for scarce supply could ultimately cause inflation, a recession, and increased geopolitical friction.

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Add it up and many analysts see a continued rise in prices. “I think we’re headed toward $85 this year; it’s oil’s technical destiny,” says Phil Flynn, an analyst with Alaron Trading in Chicago. “In the last few years, we’ve added an average of about $10 a year onto the price, and that could continue through the decade. It seems this bull cycle is a long-term trend, barring a change in economic fortunes.”

He thinks that political tensions—between the countries that control oil supplies and those that need them to fuel their economies—are only going to grow in the years ahead. “We also have to look at geopolitical tension in this scramble,” says Flynn. “We’re already starting to see oil used as a political tool, and the power is likely to continue to shift away from consumers and toward producers.”

Business Week