January 07, 2008

$200 a barrell for oil?

Not yet and not likely barring some unforeseen event. Like the well heads in the Gwahar field being fused and shut off. Oh, and a nuke being dropped on the export facilities throughout the Persian Gulf.That's not stopping some speculators from bidding up futures on oil with a $200 strike...

Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period. The contracts, the cheapest way to speculate in energy markets, appreciated 36 percent since early December as crude futures reached a record $100.09 on Jan. 3.

While analysts at Merrill Lynch & Co. and UBS AG say the slowing U.S. economy will lead to the biggest drop in prices since 2001, the options show some traders expect oil to rise for a seventh straight year. Demand will increase 2.5 percent in 2008, according to the International Energy Agency. U.S. inventories fell to a three-year low on Dec. 28. Production from Mexico is declining and Saudi Arabia is behind schedule in opening its newest field.

``One hundred dollars a barrel is actually 14.9 cents a cup, so we're still talking about oil being remarkably cheap,'' said Matthew R. Simmons, chairman of Simmons & Co. International, a Houston-based investment bank that focuses on energy. Inventories ``are tight as a drum and I don't see how we get out of this box,'' he said in a Bloomberg television interview last week. ``Demand clearly isn't starting to slow down.''

Simmons was one of the VERY few people in the late nineties talking about oil over $50/bbl when it was in the $20's. He was predicting a production peak in this decade and he may have been right. No, the current price is related more to weakness in the dollar and geopolitics than peak oil. Still, it is the reason oil should be between $50 and $60 just based off supply and demand.

Posted by mcblogger at January 7, 2008 02:24 PM

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