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By Robert Rapier on Sep 20, 2007 with no responses

WTI Breaks $84

Tags: Oil Prices

Front month WTI broke $84 today for the first time ever. I have seen some comments recently from people who think I am sure to lose my bet by year end. I still don’t think so. A devastating hurricane churning through the gulf, or a spectacular geopolitical event could push the price that high in a hurry, but outside of that I don’t see it. I think there would be a lot of profit-taking between here and $100 that will prevent any sort of headlong rush to $100 (again, barring the spectacular event). For the record, I think prices will ease between now and the end of the year, and will close the year somewhere in the $70′s.

In related news:

The debate behind $80 oil

Although top oil executives feel $80 is too high, there’s an ongoing debate among experts as to whether that price is justified.

Since early 2000 the strong and growing oil demand in the U.S. and abroad with fairly static supplies is the main reason behind oil’s surge, according to most analysts. Oil has gone from $20 in 2002 to over $80 today.

That price jump has also attracted lots of investors, which could be the “something else going on” that Tillerson believes is driving up prices.

“There’s clearly some financial players pushing up the price of crude,” said Carol of Johnson Rice & Co. “Given the current supply-demand scenario, $80 is not justified.

“But opinions are split as to just how much speculative investors are driving crude prices.

Beutel notes that only 18 percent of the “long” contracts on the New York Mercantile Exchange – meaning bets where the investor thinks the price of oil is going to go up – are held by investment funds. Seventy five percent are held by people who actually use the oil.

Moreover, he said only nine percent of the total contracts on NYMEX are held by investment funds.

“I just don’t buy the ‘speculators are doing it’ argument,” said Beutel.

Fitzpatrick, a speculator himself, said the investment premium of on each barrel of oil is only about $4 or $5. The rest he said can be attributed to the fundamentals:

“China is not going away, India is not going away,” he said “They are going to drink up this oil.”

Personally, I don’t think it’s a big mystery why oil is at $84. When Rex Tillerson says that he “cannot explain why we have $70 oil today. We are not having trouble finding oil. There is something else going on that I don’t get” – I believe the answer is clear.

Excess capacity has largely been used up, and this puts incredible pressure on prices. The fear premium grows as excess capacity decreases, and countries are bidding on that remaining capacity. Consider what might happen if suddenly you took a million barrels per day off the market. How high might the price go? It is really hard to predict, but the math probably looks something like this: Take 1% of the supply off the market, and watch the price increase by 10%.

I think Saudi is about to be called upon to open up the taps more than they agreed upon at the recent OPEC meeting. If they don’t (or can’t) then I do think there is a good probability of seeing $100 oil in 2008.