For Oil, $100 May Be Just a Pit Stop Along the Way

Jeff Cox, |Special to

Welcome to $100 a barrel oil and enjoy your stay. You're likely to be here a while.

Locals ride a canoe past oil instalations belonging to the Mobil oil company in Bonny Island, Nigeria, Thursday, Aug. 17, 2006. Militant groups using kidnappings and sabotage attacks to press their demands for a share of the region's oil wealth, which they accuse the central government of stealing, have made southern Nigeria a volatile place. (AP Photo/George Osodi)

Light, sweet crude passed the century mark Tuesday and closed above it for the first time, setting off speculation about just how high prices could go and where a realistic level of support may lie. Once considered an impossibility, such prices are now a fact of life.

"I certainly think it's a harbinger of things to come. Yesterday's spike was for a multitude of reasons ... and we have to understand that none of these things are going to go away," said Kevin Kerr, an analyst at Resource Trader Alert. "Really this is probably just a stopping point on the way to $120 a barrel."

The surge in oil has come on the heels of various factors -- some purely speculative, but others fairly fundamental.

Commodities in general have been booming as stocks remain mired near bear-market levels, and bond yields fall as investors flock to Treasurys for safety.

But in oil's case, there are other factors: Geopolitical tensions in Venezuela and Nigeria threatening supplies; higher demand with peak driving season on the horizon; and recalcitrant officials at the Organization of Petroleum Exporting Countries who are vowing to defend an $80 a barrel baseline.

Like other commodities, oil will have some volatility -- the price Wednesday at one point dropped more than $1 a barrel before rising again. But the OPEC stand and its accompanying pledge not to increase production despite a surge in costs has most analysts convinced that oil has found its range and is unlikely to back off anytime soon.

Oil Bubbles Back Above $100

"There's some speculative buying definitely contributing to this," said Ray Carbone, of Paramount Options.

"I think (the price) is showing a very, very tight market in general and it shows that no matter what the economic numbers are -- and they have been slow and a little bearish on demand -- supply concerns will always trump bearish numbers."

Oil's price reverberates through the economy because of Americans' reliance on it to fuel their cars and heat their homes and businesses.

The surging price, combined with a higher-than-expected reading Wednesday in the Consumer Price Index, helped stoke inflation fears that could dissuade the Federal Reserve from further interest rate cuts.

"Oil at $100 a barrel right now is going to really kind of put the final nail in this coffin," said Ben Lichtenstein, of Traders Audio. "If we're teetering on a recession with oil sustained above $85 a barrel, what's $100 going to bring right now? Again, $100 is just a little speed bump right now. We're on our way to $120 easily."

But Kerr, of Resource Trader Alert, cautions investors on how they play the oil market. Though prices seem enticing for going long on oil futures, he instead advises plays on undervalued refiners and drillers, citing Halliburton and Schlumberger as possible moves.

"Oil's something that can go back down, because I think the demand equation's going to hit us," notes Robert Wiedemer, author of "America's Bubble Economy." "I think the economy's going to continue to slow down and I think that's going to hit oil, and I don't think there's any way around that, so I'd be a little careful about playing on that side."