Oil to Hit $100, but Experts Say Sell the Rally
Even as U.S. crude prices are expected to touch $100 this week as the strengthening Tropical Storm Isaac threatens to disrupt offshore oil production in the Gulf of Mexico, experts say the upside will likely be short-lived, recommending investors sell into the rally.
Nymex light sweet crude climbed over $1 to $97.39 on Monday, after the U.S. National Hurricane Center warned that Isaac was expected to strengthen to a Category 2 hurricane and hit the Gulf Coast midweek. (Read More: Isaac Heads for Gulf Coast, Hurricane Warning Issued.)
The Gulf of Mexico accounts for around 20 percent of America’s oil output, or 1.4 million barrels of crude daily, according to the U.S. Energy Information Administration.
“This potential disruption is coming at a time where prices are already in the higher end. Unless we get a significant amount of oil capacity taken off the market, the chances are this sort of event won’t have a significant impact from a medium-term point of view,” Ric Spooner, chief market analyst at CMC Markets told CNBC.
Spooner forecasts the upside will be capped at $102 in the next week, given the country’s reserves and sufficient capacity in the rest of the world.
Dominic Schnider, Head Commodity Research at UBS Wealth Management, agrees it is “highly likely” that oil prices will touch $100, but adds that the move is likely “short-term.”
“I don’t expect a lot of real damage to infrastructure (in the oil fields) … things have been modernized, oil rigs have been the replaced and the new ones will be able to withstand such storms,” he said.
In this context, both Spooner and Schnider recommend that investors take profit.
“The global demand outlook (for oil) is for moderate growth at best and is well covered by supply capacity ... I’m looking for opportunities to sell into the current strength anywhere from here on up to about $102 a barrel (for US crude) and $120 a barrel for Brent,” Spooner said.
Schnider advises to wait until the eve of Tropical Storm Isaac’s landfall — forecast for early Wednesday — when uncertainty is at its highest, to sell oil.
“When the market realizes damage isn’t so severe…we expect prices to fall,” Schnider said.
— By CNBC’s Ansuya Harjani