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Oil Prices Could Be Nearing A Peak After Record Rise

Kenneth Stier, |Features Writer
Wednesday, 28 May 2008 | 5:01 PM ET

The unprecedented run-up in oil prices may finally have reached a peak as the dollar stabilizes, Saudi Arabia boosts production slightly and demand slows, analysts say.

Oil Refinery
Oil Refinery

Some believe a major price correction could begin this summer, though few expect oil to go below $100 a barrel.

Of course, there is still a chance prices could continue rising in the short term, particularly as the US enters the summer driving season. But energy analysts say any price bump would be muted and short-lived.

“Until further notice this is bull market we are looking at but I would not be surprised to start to see these fundamentals change,” says Jack Bouroudijan, of Brewer Investment Group.

He said that the Department of Transportation report Tuesday that Americans drove 4.3 percent less miles driven in March than a year previous was “indicative” of one of these fundamental changes. That triggered an oil price slide.

“I think you are seeing a change in habits, you seeing a change in driving habits, you are seeing a change in the way energy is being used,” he added.

Other possibly significant developments: the cracks beginning to show in the subsidies regimes maintained by Asian governments that keep oil cheap for domestic consumers, and a production boost from Saudi Arabia, which while modest, signaled sensitivity to the need to ease global pain due to higher prices.

To some these are the first pinpricks in the commodities bubble many say was never fully justified by some tightening in the demand-supply equation.

‘This is an absolutely a bubble where all this fear and greed is being compressed into prices and driving them up,” said Steve Schork, publisher of The Schork Report.

America's Oil Crisis
Discussing whether we're seeing the beginning of a downward trend in oil, with Stephen Schork, of The Schork Report; Roger Diwan, of PFC Energy; and Jack Bouroudjian, of the Brewer Investment Group

Now “some exuberance is being exorcised out of the market – is this the turning point, it very well could be,” he added in an appearance Wednesday on CNBC’s Squawk Box,.

He said he expected prices to drop roughly $125.

“This has been a bull market that has had a very weak heart at the center of it … lot of underlying weakness in the markets has been filtered out and that is eventually going to drag prices down,” said David Kirsh, an oil analyst with PFC Energy.

He points to notable weakness in US demand for gasoline and fuel oil, but also to the lag time in key data that obscures this weaknesses for months, especially for Asia.

“A lot of market participants are going to continue to buy bullish forecasts and not sell bearish until they see the actual data,” he said. With lots of outstanding put options the correction could be steep – possibly to $100-110, he cautioned.

He said he expected the reappraisal to begin in July and August.

But make no mistake: many are still bullish because of what they see as implacable fundamentals.

They say analysts focus too much on US demand but that world demand is still growing faster than non-OPEC oil is comes online – although more is expected by year’s end.

They dismiss Saudi Arabia’s recent 300,000 barrels a day increase as token in the face of globe’s daily demand of 85 million barrels a day.

Also they note that, China, the biggest importer, has not yet buckled on the pressure of higher prices - in part because the yuan’s appreciation has muted the impact of dollar-denominated oil prices.

These factors are behind the 48 percent rise, since March, of crude futures for delivery 2010-216. “The futures market is telling us that oil will get tighter, not looser in the coming years,” said a Credit Suisse note issued this week.

This viewed was reinforced by the chief economist at the International Energy Agency, Fatih Birol, (IEA) who told German TV earlier this week that it would be “very, very optimistic" to expect oil prices to fall much because of tight supply.

“When we look a couple of years ahead, we should be very, very optimistic if we would believe that the current oil prices will go substantially down," Birol was quoted as saying by German state broadcaster ZDF.

The value of the dollar and inflation are other factors analysts say will effect oil prices moving forward. That’s particularly true of the huge money flowing into oil sector as a hedge against inflation.

Wilbur Ross said more than 25 percent of trading in oil futures is for investment purposes unrelated to hedging. “I don’t know what that translates into in price but I would bet you it is $10-20 barrel,” he told CNBC audience Wednesday.

“It’s become a trading commodity rather than a consumption commodity,” he said.

Since there is no indication of physical shortages of oil – as there has been during other price run-ups – he said it would take a psychological jolt to change market sentiment.

“But betting against market sentiment is like staring down a freight train,” cautioned Kirsch.

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