Will Oil Spike To $150?
Highly uncertain European economic news is turning the US stock market into an absolute roller coaster.
Case in point, the Dow spent the past two weeks trading as high as 12,272 and as low as 11,650. That’s an ultra-volatile 5% short-term trading range that’s making for a wild ride in just about every stock out there.
As I write, the Dow is trading smack-dab in the middle of that range at 11,900. There’s no question, the US stock market is still getting its marching orders from European headlines.
But there’s one market largely unaffected by the recent uncertainty overseas.
Oil.
While the Dow’s been bouncing around like a five-year old on a sugar high, oil’s been steadily climbing. In fact, over the same two-week period, oil’s gone from $90 a barrel all the way up to over $98… an 8% jump.
At this rate, crude will be trading at the all-important $100 a barrel mark by this time next week, if not sooner.
Why is crude rallying so strongly?
A number of interesting developments are pushing oil higher.
First off, we have this week’s Energy Information Administration (EIA) inventory report. It showed US crude oil stocks are at their lowest point since December of last year.
Now, that in itself isn’t all that startling.
But oil market analysts getting caught off guard by the drawdown is. You see, analysts were expecting an inventory build. But they got a big drawdown instead. A sharp import decline sent commercial oil inventories falling by 1.4 million barrels.
Now keep in mind, the EIA reports come out every Wednesday at 10:30 am eastern time. If there’s a big surprise like there was this week, it can send oil up (or down) in a hurry.
But that’s just the beginning…
An International Atomic Energy Agency report released earlier this week put oil bulls firmly in the driver’s seat. The bombshell report revealed Iran is suspected of conducting secret experiments whose sole purpose is to develop nuclear arms.
Of course, this isn’t exactly breaking news…
Everybody the world over has suspected Iran’s nuclear weapons ambitions for years now. But the news definitely put a bid under the oil market. I highly doubt anything will come of this news in the near term, but it’s something to keep an eye on.
The week’s most significant oil news, however, came for the IEA…
In their annual World Energy Outlook, the International Energy Association (IEA) warned of oil spiking to $150 a barrel. The report says that if a required $100 billion per year isn’t pumped into the Middle East/North African region between 2011-2015, oil will shoot remarkably higher.
IEA economist Fatih Birol said if Middle East production growth doesn’t live up to market expectations, the world will suffer from high oil prices. He also said 2011’s average crude price of $102 is already putting the global economy at risk.
Not exactly reassuring news.
Of course, OPEC disagrees with the IEA.
The oil cartel sees downside risks to oil demand due to European debt troubles. And they have no intention of raising production in the near term as they see the global oil market well supplied.
So now that we’re back near $100 a barrel, what happens next?
If Europe’s debt issues simmer down, I think oil will break above $100 by year-end. The global oil supply/demand balance is incredibly tight and prices will likely continue higher if Europe gets its act together.
However, if Italy presents a big problem for global markets, I find it hard to imagine oil not pulling back considerably.
What should you do?
Now’s a great time to take a close look at companies benefitting from high oil prices. Multinational oil companies like Apache (APA) and Occidental Petroleum (OXY) are a good place to start.
Category: Commodities
