Analysts: $50-a-barrel oil a definite possibility

Market is absorbing available crude oil; concerns about Yukos, Iraq and terrorist attacks also driving prices

Brad Foss

Associated Press Business Writer

With oil futures roaring past $44 a barrel amid supply concerns and rapidly rising global demand, analysts say it’s possible prices could reach $50 in the not too distant future.

“Fundamentally, there are some pretty crazy prices that are justified,” said Jamal Qureshi, an oil market analyst at PFC Energy, a Washington-based consulting firm.

“OPEC is putting out a lot of oil, but the market is absorbing it,” Qureshi said.

PFC Energy estimates that total global production will average 82.1 million barrels a day in 2004, or just 100,000 barrels a day above consumption, leaving very little cushion in the market in the event of a supply disruption.

Geopolitical uncertainty

—In Russia, the worry surrounds the fate of troubled oil giant Yukos, which produces 2 percent of the world’s oil but is under pressure from the government to come up with billions of dollars in back taxes.

—In Iraq, insurgents’ attacks against oil infrastructure are setting back the reconstruction of the industry and sending shockwaves through already jittery oil markets.

—And on Aug. 3 the president of the Organization of Petroleum Exporting Countries, which accounts for about a third of global output, warned that it could not immediately boost output any further.

That helped propel light crude for September delivery to a closing price of $44.15 — an all-time high on the New York Mercantile Exchange, where futures have been trading since 1983. Oil prices also hit new heights in London on Aug. 3, closing at $40.64 on the International Petroleum Exchange.

Saudi soothing ineffective

Moreover, it could take several years before significant amounts of new capacity are added around the world in places like Central Asia and in deep waters off the coast of West Africa, analysts said. Keep in mind, they added, global demand is likely to keep rising as well.

“It doesn’t seem any supplies available in the near term will dampen prices,” said Peter Beutel, president of energy consulting firm Cameron Hanover Inc. in New Canaan, Conn.

“I don’t know if we’ll see $50, but it looks like prices want to climb higher here,” Beutel said.

Worldwide demand up sharply

“The demand growth in China and the U.S. has caught a lot of the producers by surprise,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

He believes that the sharp decline in prices in the late 1990s has resulted in a legacy of hesitancy among major oil companies to invest significant amounts of capital into exploration and production. The price of oil fell below $11 per barrel in December 1998, due to abundant supply.

Even with signs of global oil demand rising — and gasoline prices shooting above $2 a gallon this summer — “they didn’t want to believe it because they’ve been burned in the past,” Flynn said. “Now they’re behind the 8-ball and are going to be playing catch up for years.”

To be sure, today’s high prices could begin to sap demand or, worse, begin to weaken the economy — both of which would lower the cost of oil. Analysts believe another terrorist attack in the United States would cause a brief run-up in oil prices, but that they would eventually fall because of the negative impact such an event would have on the economy.

Many analysts are predicting oil prices to average $35 a barrel in 2005, and that doesn’t factor in an unexpected loss of supply. “The thing is,” Flynn said, “a lot of stuff has to go just right for us to avoid $50 a barrel.”