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Kilduff: On Our Way to Triple Digit Crude

Friday, 15 Oct 2010 | 2:38 PM ET

The recent rally in crude oil has stalled out, after coming within reach of $85 per barrel last Thursday. While there has been some fundamental under-pinning to the move, in the form of several supportive weekly inventory reports from the U.S. Energy Information Administration, it is the dollar's precipitous declineand the specter of quantitative easing ("QE") by Federal Reserve that is dominating the overall discourse around the markets, generally, and is at work in the energy patch. (*Read this: 'Quantitative Easing': What Does It Really Mean for Investors?)

The impact of the dollar's decline has varying implications within in the energy realm, due to the fact that crude oil is almost universally priced in dollars.

In the case of China, as a major consuming country, higher crude oil prices should represent a headwind to economic activity, especially since its own buying power is being eroded as result of the yuan's much criticized peg to the dollar. However, being a robust exporter, this same peg serves China's interests and a an offset, by allowing its goods to be sold into Europe and other countries at even more competitive levels than currently exist, enabling its economy to continue to chug right along, despite the rise in crude oil prices.

Being so energy intensive, there may well be an energy price breaking point for China, if not its customer base. We have seen China's crude oil appetite continue to grow: September's imports were the highest of the year, approaching 6 million barrels per day.

The dollar's decline does represent some sweet revenge for U.S. consumers against OPEC, which met this week with barely a notice. A notable complaint over their diminished petrodollar buying power had several members expressing a desire for $100 per barrel oil, in order to maintain an orderly market and investment in the sector. In terms of output quotas, they were maintained at current levels. Their hopes to be relevant again were raised markedly, however.

OPEC
AP
OPEC

OPEC's desire of a return to triple-digit oil awaits the implementation of QE next month.

At this point, $80-plus oil has figured in a moderate amount of QE, and the ultimate announcement, if there is one, will determine price action into the end of the year.

QE much above $500 million should be the catalyst for generating a move to $100 per barrel. QE below that level will likely represent a disappointment for the markets that will take energy prices back down to the low $70s.

The fundamentals are not likely to support prices above $80, on their own.

The early winter weather forecasts that I rely upon are indicating a slow start to the heating demand season. Unemployment, especially weekly claims above 450,000, do not bode well for gasoline demand, and indicators out of the trucking industry, in terms of diesel demand, are mixed. The hurricane season was, thankfully, a non-event, and with the exception of the ongoing French refinery workers strike, there is little in the way of geopolitical or potential supply disruption events to worry about. The French refinery work stoppage has impacted storage levels of refined products, and is becoming a growing factor, as it drags on.

So, can or will the Federal Reserve deliver us $100 oil? As the ol' Magic 8-ball would say: it appears likely. This week's inflation readings were below the Fed's stated target; the weekly jobless claims data topped 460,000, moving back in the wrong direction; and the Fed seems willing to ignore the food and energy inflation, which we are all urged to exclude anyway.

It will take a QE regime of $1 trillion or more to create the financial physics necessary to engender another significant leg lower for the dollar and move higher for crude oil, but this is what we're likely to get. And get all that comes with it, including triple-digit crude oil.

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

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