Will Lower Oil Prices Be a Surprise in October?

Absent a Mideast crisis, oil prices have likely seen their 2012 highs, and Brent could easily slide to $100 or below before the end of the year.

Seth Joel | Photographer's Choice RF | Getty Images

Brent crude, the international benchmark, has plunged 7.3 percent this week to $108.19, and is off 14 percent from its year high of $126.22 per barrel. West Texas Intermediate crude , traded on the Nymex, has also been in free fall, losing 3.5 percent Wednesday and 7 percent in the past three sessions to $91.98 per barrel. (Read More:Get Oil and Natural Gas Prices Here.)

“There was a lot of froth in the market,” said Hussein Allidina, head of commodities research at Morgan Stanley.

He also said supplies are strengthening as demand is decreasing, due to both seasonal factors and as a result of the high oil prices. The latest evidence of ample supply was EIA data Wednesday showing U.S. crude inventories rose 8.5 million barrelsin the week ended Sept. 14, much larger than expected. (Read More:Crude Plunge Presents Opportunity, but Not in Oil Market—Pros.)

“I would not be surprised to see Brent, by the time we get to the middle or end of October, pricing under $100,” said Edward Morse, head of commodities research at Citigroup. WTI could be under $90. “I think the low point would be sometime between the middle of October and middle of November.”

Morse also said gasoline, rising rapidly in August and September due to refining issues and Hurricane Isaac, could start to decline. “The gasoline market should ease substantially by the middle of winter,” he said. Morse said he expects to see gas prices head back to $3.50 per gallon, from the current national average of $3.85 per gallon.

Oil has also been hit by reports that Saudi Arabia is pumping more, and the fact that the White House continues to hold out the possibilitythat it will dip into the Strategic Petroleum Reserve if oil prices rise too much. Allidina expects Brent crude to average about $105 for the rest of the year, and says it could dip below $100 but would not stay that low for long. WTI could trade at about $90, he said.

The market has lost much of the geopolitical premium that returned after the U.S. Ambassador to Libya and three other Americans were killed last week. It is also not being pressured much by the tensions surrounding Iran’s nuclear program, which has resulted in financial sanctions and an oil embargo against it. (Read More: How to Play Middle East Unrest Using Currencies.)

“We don’t know what’s going to happen in the Middle East. We don’t know how that plays out. That keeps people on edge,” said Allidina. He said, for some investors, the comment from Israeli Prime Minister Benjamin Netanyahu this weekend that Iran is six months away from having enough enriched uranium for a nuclear bomb pushed back the idea that Israel would attack Iran in the near future.

Meanwhile, news on supply is getting more bearish for oil. Saudi Arabia oil minister Ali al-Naimi said last week that current supply and demand do not justify current prices, and a news report Tuesday quoted a Gulf official saying Saudi Arabia was currently pumping about 10 million barrels a day. OPEC is already producing record levels, and production in North America continues to grow.

“Obviously there is discussion around the SPR, which I think is a headwind to investors who are trying to stay long oil,” Allidina said.

He also said the news from Saudi Arabia has also had big impact. “I think there’s some evidence that it’s not just chatter, but it’s backed by a physical increase in production,” he said.

The White House, in comments this week, gave a nod to Saudi Arabia, praising it for a “continued commitment to take all the necessary steps to ensure the market is well supplied.” The comments were an unusually open recognition of Saudi cooperation.

“It’s unusual enough for one to make a judgment call that there’s a high probability there’s coordination between the Saudi statement and the White House,” said Morse.

WTI soared to $100 last week as the Fed announced its latest round of quantitative easing. “The market shot up significantly faster than any of the indicators behind the shoot-up indicated it should go. There was risk-on news across all asset classes,” he said. The announcement of more Fed easing had too negative an impact on the dollar and too positive an impact on commodities prices, he added. (Read More:Fed’s ‘QE-Infinity’ Will Push Gold Up to $2,400—Pro.)

“I don’t think the White House has made a decision on a (SPR) release,” said Morse, since Brent is now at $108, rather than a much higher level. But seasonal factors should weigh on oil regardless. “If you get Brent down to $107, you’re very close to where fair value is. Our average price forecast for the third quarter was $105 for Brent,” he said. Morse said he expects a $100 average Brent price in the fourth quarter, and WTI could be as much as $20 lower than Brent.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com