Myra Saefong's Commodities Corner
Farewell to $60 oil, brace yourself for $80
By Myra P. Saefong, MarketWatch
Last Update: 12:01 PM ET Jul 7, 2006
SAN FRANCISCO (MarketWatch) -- Crude's back at record levels, with the $60-per-barrel price we saw just last year out of the picture for now, maybe even forever, and $80 oil a real possibility by the end of the summer.
"Producers and consumers alike should get used to the fact that oil prices will likely never fall below $60 a barrel again," said Emanuel Balarie, a senior market strategist at Wisdom Financial.
The front-month contract for crude futures closed at $75.19 a barrel Wednesday in New York -- the highest closing price ever -- and the price rally has not stopped there as a world of political turmoil, direct threats to production and supplies and a strong global appetite for oil come together to rattle investors' nerves.
'Producers and consumers alike should get used to the fact that oil prices will likely never fall below $60 a barrel again.'
— Emanuel Balarie, Wisdom Financial
"Whether it be tension with Iran and North Korea, war in Iraq, summer gasoline demand, [or] refinery outages, prices are going to be very sensitive to supply disruptions and/or perceived potential disruptions," said Thomas Hartmann, an analyst at Altavest Worldwide Trading.
The oil market has been factoring in daily news related to the nuclear standoffs between Western nations and Iran and North Korea. See Futures Movers.
At the same time, the market is routinely bombarded by strong demand figures for oil from countries around the world, especially China. Refinery outages, the recent closure and reopening of a key waterway in Louisiana and storms in the Atlantic also serve as reminders of oil's fragile supply system.
Ravenous appetite
It's a fragile system indeed, with a fragile supply-and-demand balance to boot.
World-oil supplies averaged 84.34 million barrels per day in 2005, according to the U.S. Energy Department. Daily global oil demand averaged 83.97 million that year, with demand of 20.66 million from the United States and 6.9 million from China included in the figure.
World tensions are a key factor for oil's climb, but the biggest is "demand, demand and more demand," said John Person, president of National Futures Advisory Service.
Even with gasoline prices nearing $3 a gallon, there's been no sign of easing demand.
Gasoline demand over the last four weeks, essentially the month of June, averaged 9.5 million barrels per day, up 1.4% from a year ago, according to a weekly report released by the Energy Department Thursday.
"With refining capacity at a loggerhead with demand, gasoline and crude prices remain well bid in the futures market," said Hartmann. U.S. refinery utilization stood at 93.1% of capacity as of the week ended June 30, according to a government report. The five-year average is around 95%.
"Until gasoline demand materially slows or the perceived threat of a crude-oil supply disruption is alleviated, we won't see $60 oil in the near future," said Hartmann.
Far from a historic peak
There's a slim chance -- if any -- that oil prices will revert to the $60 level, most analysts said. Crude futures closed out last year at just over $61 a barrel.
Scenarios that would prompt a decline in prices include a slowdown in U.S. growth and easing tension in regard to Iran, according to Jason Schenker, an economist at Wachovia Corp., who considers the threat of oil disruption from Iran the "biggest upside risk to oil prices."
Other possible reasons for a fall back to $60 for oil: a demand decline or an alternative fuel source, according to Person.
But right now, hybrid cars are not selling fast enough to replace the high gas-consuming SUVs and pick-up trucks on the road, he said, pointing out that car sales are so slow that manufacturers and dealers are offering 0% financing.
"Gasoline over $3 in most U.S. cities is being felt by consumers, but not enough to incite rationing," he said.
Given that, Person sees "no place but for prices to climb higher ... before we see a decline and relief at the pumps."
