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Kilduff: Get Ready for $100 Oil

Crude oil prices re-took the $70 per barrel level, yesterday, and they are poised to climb further. In fact, prices are likely to hit the $100 mark before year-end. Economic and geopolitical factors are at work, once again, to produce a return to triple-digit oil.

Tight oil and refined product have accompanied periods of economic normalcy going back to 2000.

If you recall, then President Clinton released oil from the US Strategic Petroleum Reserve in reaction to rising prices caused by a tightly supplied marketplace.

The energy supply chain was able to catch its breath and replenish, due to the economic slowdowns that resulted from the dot-com bubble bursting and the terrorist attacks of September 11, 2001.

The current economic contraction, unprecedented in recent times, represents another timeout.

Over this same period, China steadily transformed itself from a net exporter of crude oil to the second largest importer, second only to the United States.

Despite all the talk and analysis surrounding China’s economy, its appetite for raw materials and energy is being underestimated. China has been consistently using its vast currency reserves to lock up physical supplies of oil around the world. We have seen several high-profile loan agreements with sovereign nations whose repayment terms consist of oil and gas, not more Yuan.

On the geopolitical front, perennially unreliable Nigeria is becoming an even greater problem: mere separatist strife, with demands by local rebel groups for a greater share of oil revenues, may be transforming into another religious battle ground, pitting much of the Muslim northern part of the country against the predominantly Christian oil-rich south.

The talk that swirled last year about a possible strike by Israel on Iran’s nuclear assets is also gaining renewed currency. Rhetoric is emerging from many quarters about the necessity and timing of such a strike. The implications for the oil markets are clear: we can expect Iran to try and take us all down with them, as they assuredly will attempt a closure of the narrow Strait of Hormuz, where two-thirds of the world’s oil transits.

The economic calamity of 2008 only pushed oil prices down to the low $30s for all of a few weeks. Most are surprised at the rapidity of the equity market rally, when, in fact, it pales in comparison to breathless rise in energy prices. The global energy industry reacted quickly to the collapse in prices, shuttering drilling operations by 50%, curtailing refinery operations, and oil output was aggressively dialed back by Saudi Arabia, in particular.

It is, therefore, relatively easy to construct the argument for $100 oil.

The effects of a depreciating dollar and a wildcard hurricane or two have not even been broached here, and the fact set, even absent them, is compelling.

Thankfully, there is something of an economic recovery underway; however, nothing has been done to address the global energy crisis. The markets have a good memory, and the math is pretty easy. (Last month, China looks to have imported near record amounts of crude oil, by the way.) A return to normal economic conditions should pressure the supply chain quickly. Also, after having gone to nearly $150 per barrel, the $100 mark is also a lot less remarkable. Look for its return sooner rather than later.

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John Kilduff
John Kilduff

John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.