Dec 17, 2007 (Dow Jones Newswires)
After a record-smashing year with oil peaking at $99 a barrel in 2007, a world of triple-digit crude oil awaits in the coming year, energy experts say.
Trading below $51 a barrel less than 12 months ago, crude prices hit their first in a fusillade of all-time highs in July and never looked back.
While some blame the frothy crude market on speculation rather than the simple rules of supply and demand, the only force that managed to slow prices down at all this year was fear of an economic slowdown, as oil fell below $90 a barrel just weeks after hitting a record.
But as the U.S. Federal Reserve cut interest rates and moved to inject liquidity into the financial sector, oil prices have been creeping back as 2007 draws to a close.
With its price spiking so quickly, the impact of record crude has yet to fully filter through the economy, but that's expected to change next year.
Gasoline prices, which have held at about $3 a gallon for much of the year, could rise to about $4 in the new year, for example.
"We think $100 per barrel oil is on the horizon in 2008, perhaps in the spring," said Brian Hicks, co-manager of the Global Resources Fund. "Our forecast sees an average oil price around $80-$85, up from about an average of $70 in 2007."
He's far from alone. About 54% of a Barclays survey of 150 commodity investors expect the average price of oil over the next five years to top $100 a barrel, with 27% responding that it would be $80-$100 a barrel and 16% expecting $60-$80 a barrel.
This view is largely backed up by the Energy Information Administration, the official statistics center of the U.S., which just upped its oil price outlook to an average of $84.93 in 2008, from its earlier view of $80 a month earlier.
"Expectations that tight market conditions will persist into 2008 are keeping oil prices high," the EIA said in its latest short-term outlook. "Despite the OPEC decision...to hold production quotas steady and downward revisions to projected consumption growth in 2008, the oil balance outlook remains characterized by rising consumption, modest growth in non-OPEC supply, fairly low surplus capacity, and continuing risks of supply disruptions in a number of major producing nations."
Eric Bolling, an independent oil trader at the Nymex, said conditions that led to a record-breaking year will likely persist over the next 12 months at least.
"It's a weak dollar, it's a strong global economy, it's China growing quickly at 13%," he said. "It's been a perfect storm for a commodity bull run. That's going to continue to go. There's no signs of its slowing down, by any means."
He sees oil ranging from $60 to $120 a barrel next year, with spikes as high as $130 or more in the case of a major hurricane or geopolitical flare-up.
"Oil is going to be very volatile," he said. "It's an election year, there's going to be a possible recession..."
That could translate to gasoline prices of about $4 a gallon by the time the hot summer driving season arrives, he said.
Recap Of Wild Ride
The year 2007 began quietly enough, with oil prices at $61.05, comfortably below the previous record of $77.03 set July 14, 2006.
It fell to a low of $50.48 on Jan. 18 only to begin an upward climb, cracking $60 on Feb. 21 and $70 on June 29.
On July 31, the first of several all-time records began rewriting the books with a closing trade at $78.21, up $1.38, on the heels of a six-year high in consumer confidence.
"What's great about this rally is that it is being driven by good economic news and not some type of bad news - no hurricane, war - just good old fashion demand and rising demand expectations," Alaron Trading Senior Analyst Phil Flynn said at the time.
The next record of $78.23 came on Sept. 11 after OPEC moved to boost production by 500,000 barrels, amid doubts that the group could actually achieve the increase. Six out of the next seven sessions saw fresh records amid speculation over recession, OPEC and other issues.
Oil broke through $80 for the first time on Sept. 13. It continued setting records in subsequent trading days until hitting $83.32 on Sept. 20 on jitters about refinery shutdowns in the Gulf of Mexico as the 10th storm of the Atlantic hurricane season bore down.
That record lasted less than a month, until oil jumped to $83.69 on Oct. 12, and then rose another $2.44 the next trading day to close at a fresh record of $86.13 on Oct. 15. The rise still wasn't over, as records fell at $87.61 on Oct. 16 and $89.47 on Oct. 18.
With the dollar weakening against foreign currencies, oil staged yet another rally within a couple of weeks, breaking through the $90 barrier on Oct. 25 and hitting $95.93 a barrel on Nov. 2.
Finally, oil came within just 71 cents of $100 a barrel, hitting an all-time intraday high of $99.29 a barrel in electronic trading early on Nov. 21.
The record closing price of $98.18 was set on Nov. 23 in thin Thanksgiving holiday trading.
During the record run, Tesoro Corp. (TSO) economist Lynn Westfall blamed speculators for the oil rally that was squeezing the profits of refiners because of the rising cost of raw materials to refine into gasoline and other products.
Pushing back against the prevailing thought of tighter supply, Westfall said oil should rightly be priced at about $60 a barrel.
Along with record oil prices, shares in energy companies rallied even as the Dow Jones Industrial Average and other indexes struggled at times this year. Money flowed out of the financial sector and into energy.
How To Play $100 Oil
Stephen Leeb of Leeb Capital Management - who also expects oil prices to break $100 a barrel next year - said an economic slowdown could push prices down, but he's not betting on it.
"OPEC didn't raise production at its December meeting because they don't have much more to sell," he said.
He pointed to rumors that Saudi Arabia's main oil field could be reaching peak capacity and that the country lacks the political will to develop its energy infrastructure amid a tight labor market and political dissent.
As these oil rich nations develop, they're going to need their oil to fuel their own economies, instead of exporting it to the U.S., he added.
Leeb said he's eying the oil services sector for fatter profits in 2008 as it grows more costly to extract precious energy from caches deeper underground.
Leeb, fund manager of Leeb Capital Management, said he likes Transocean Inc. (RIG), Schlumberger Ltd. (SLB) and Diamond Offshore Drilling Inc. (DO).
"They're all cheap, with multiples toward the low end of historical levels," he said in an interview with MarketWatch.
Fund manager Brian Hicks said markets could get a bit of a break from greater refinery utilization of an estimated 90% next year, up from 88% in 2007 after outages heading into the summer driving seasons.
However, gasoline inventories could begin the year at lower levels, and crude supplies will be at their lowest levels in four years heading into 2008, he said.
"OPEC has grown accustomed to higher oil prices, particularly in the face of the falling dollar," Hicks said. "OPEC will likely keep production back because we still have not seen meaningful demand destruction from higher prices."
Hicks said big oil stocks appear attractive, since their stock prices appear to reflect a world of $50-$55 oil, rather than $80-$100 oil.
"We like Marathon Oil (MRO) because of its combination of low valuation, strong refining business and steady upstream production growth," Hicks said.
Like Leeb, Hicks is also bullish on oil services stocks such as Schlumberger as oil majors boost exploration spending to an estimated $370 billion next year.
Keith Wirtz, chief investment officer for Fifth Third Asset Management, said even if oil fails to crack $100 next year, the world still faces the end of the era of cheap oil.
"We will never see oil trade below $30 a barrel again," he said. "From an investor's vantage point, that represents a paradigm shift. Because of a lot of geopolitical and other factors, oil is under tremendous demand as the world goes through an expansion. If anything, investors have to get used to it."
Copyright (c) 2007 Dow Jones & Company, Inc.
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