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By Robert Rapier on Oct 15, 2007 with no responses

Oil Tops $85

Update: Oil smashes $86 for the first time

This week’s inventory report will be very interesting. If there is a significant build, the price could unravel quickly. If there is another surprise on the downside, we may crack $90 by the end of the week. But as long as oil prices stay at these levels, Saudi is going to be under pressure to increase production by more than the already announced 500,000 bbl/day. If they truly have spare capacity, they have been playing Russian roulette with the economy. They may have let it go a little too far.

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The price of oil continues to climb:

Oil tops $85 for the first time

SINGAPORE (AP) — Oil prices kept rising Monday after closing at a new record in the previous session on worries that supplies are insufficient to meet coming winter demand and concerns over the conflict between Turkey and Kurds in northern Iraq.

Recent reports have indicated that crude inventories are falling. Last week, the U.S. Energy Department reported that U.S. oil supplies declined in the week ended Oct. 5, while the International Energy Agency said that oil inventories held by the world’s largest industrialized countries have fallen below a five-year average.

Some analysts think the supply shortfall in last week’s U.S. Energy Department inventory report is an anomaly. They doubt demand is as strong as recent forecasts by the department and the IEA suggest. These analysts expect oil prices will soon begin a seasonal decline to $70 a barrel, or lower.

Count me among those in the anomaly camp. No way would I be a buyer at these prices; I think your downside risk is great, and your upside potential is small. Longer term I think oil prices are going to stay high, and I won’t be surprised to see it crack $100 next year, but I think prices have gotten a bit ahead of themselves at the moment.

I was doing some research over the weekend on predictions that have been made by oil industry analysts. I thought this one was interesting. From September 2006:

$1.15 a Gallon? Leading Oil Industry Analyst Says Prices Could Plummet

A leading oil industry analyst, Philip Verleger, believes we are going to see continued reductions in the price of oil and at the pump, perhaps to as low as $1.15 per gallon for regular gasoline.

Philip Verleger was one of the few oil industry analysts to predict dramatic price increases in the cost of oil a few years ago, but his estimates proved accurate as the price per barrel soared to nearly $80 this year. With the increase came significant upward pressure on transportation costs, heavy fuel surcharges by carriers, rising costs for petroleum-based raw materials.

But Verleger is now predicting the current reduction in oil prices is no temporary aberration. According to a story in The Seattle Times, Verleger believes a combination of financial market twists and fundamental supply and demand forces will keep driving oil lower – much lower. Verleger said it’s not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.

Oops. A year later oil prices are over 400% higher than his prediction.