Oil, A Record As Crude Nears $104, A Look Towards $125

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The price of crude came very close to $104. According to the AP "That’s higher than the price of $103.76 that many analysts believe oil hit in 1980, when adjusted for inflation into 2008 dollars." It is not bogus record, or one that can be tarnished by talk of indexing to older numbers.

The next question is whether crude will move up another 15% to 20% toward $125. While that seems unimaginable the idea of $100 oil seemed absurd just a few quarters ago.

The case for much higher oil prices becomes more compelling each day. OPEC has made it clear that it will hold production steady and may even drop output. The benefits to member nations at the cartel are simply too great. It is driving wealth into sovereign funds which they can, in turn, use to buy assets of US financial institutions and corporations while these are depressed. If they guess correctly and bank and brokerage firms rebound, they will have a handsome return.

The demand side is even more troubling. A  number of oil executives and analysts believe that some of the world’s largest fields are now mature and that they will not yield any more crude than they do today, even using technology that can drill deeper and access deposits which could not be reached a decade ago. If the fields are mature now, their production will begin to drop and the number of new, huge fields being discovered is unlikely to offset declining production at existing facilities.

Normal demand metrics are not part of the global oil industry at this point. More crude is being kept in producer countries as they add infrastructure, roads, automobiles and trucks. Large countries like India cannot do without crude to modernize.

In China, the central government distorts the cost of oil by underwriting the prices of gas and diesel. If the cost of these fuels were to reset to open market levels, China’s ability to transport goods over highways and railroads would be severely impeded.

High oil prices are not going away. The only question is how much higher they will go.

Douglas A. McIntyre