The Oil and the Glory

Oil prices are exploding — but for how long?

Oil prices are exploding — but for how long?

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:

In our view, while it is probably already too late to prevent the market from hitting $100 per barrel at points in 2011, OPEC is likely to have to play a far more proactive role to dampen any potential explosive upside that may arise and ensure that quarterly and annual averages do not reach $100 per barrel. Indeed, we do expect OPEC to exercise control of that upside earlier in the cycle compared with 2008.

Then there are the outright bears. Petromatrix, a Swiss-based firm, looks at the fall in oil prices yesterday and so far today, and sees timidity. Petromatrix Managing Director Olivier Jakob told Bloomberg that prices could plunge to $80 to $82 a barrel if speculators flee the market in droves. “If there is some genuine profit-taking from large speculators, then we need to consider the risk for further downside,” Jakob said.

Finally, Joseph Meyer, a current bull who writes over at Seeking Alpha, messaged yesterday to correct an O&G post quoting him on oil prices:

I said the price of oil could hit $200 in 2012, not 2011, and $300 in 2013. It’s a normal mistake, nothing earth-shattering. I agree that prices currently are too high and the hedgers are getting carried away. But if the US and European economies start picking up by 2012, and assuming all things stay equal in the big emerging markets, then I think at one point we see at least a doubling of oil prices from current levels, driven by both fundamentals and by super-bullish fund managers. For the average American consumer, let’s hope speculative oil prices are just a blip.

We regret the error, and side with Meyer on consumers.