Is $100 Oil Coming? $200, Anyone?

Analysts at Goldman and CIBC say $100 oil may be just months away:

“The $100-a-barrel oil that Goldman Sachs Group Inc. said would prevail by 2009 may be only a few months away.

“Jeffrey Currie, a London-based commodity analyst at the world’s biggest securities firm, says $95 crude is likely this year unless OPEC unexpectedly increases production, and declining inventories are raising the chances for $100 oil. Jeff Rubin at CIBC World Markets predicts $100 a barrel as soon as next year…

“Higher prices will increase revenue for energy producers from Exxon Mobil Corp. to PetroChina Co., while eroding profit at airlines including EasyJet Plc and railroads such as Union Pacific Corp. The U.S. and other oil-importing nations risk accelerating inflation, while higher energy costs threaten to restrain growth.

“Benchmark crude oil futures ended last week at $75.57 a barrel on the New York Mercantile Exchange, up 51% since mid-January and twice the level of early 2003. A record number of options have been sold that give the buyer the right to buy crude oil at $100. The contracts, covering 50 million barrels, only pay off should oil go above the target price…

“A National Petroleum Council study led by former Exxon Mobil chairman Lee Raymond, released last week, predicted a growing gap between production and demand for oil and gas during the next two decades. As recently as 2005, Raymond said oil prices had probably peaked and dismissed the possibility that supply and demand could not be brought back into balance.

“‘There are questions about whether the oil industry can keep up with demand,’ U.S. Energy Secretary Samuel Bodman said last week, commenting on the Petroleum Council report.

“Gasoline pump prices averaging more than $3 a gallon across the U.S., the consumer of 25% of the world’s oil, haven’t dented sales. Deliveries of gasoline were a record 9.23 million barrels a day in the first half of this year, according to a July 18 report from the American Petroleum Institute in Washington.

“‘It appears that high prices are acceptable to the American consumer,’ said Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies in Washington. ‘People want the house with a yard and white-picket fence so they are moving further and further out of the cities. They have to just get up earlier and drive further’…

“Oil prices could triple in three months, to more than $200 a barrel, given the right circumstances, according to Matthew Simmons, chairman of Simmons & Co., a Houston investment bank…

“A pullout from Iraq may be the event that pushes oil to $100 a barrel, according to Boone Pickens, the Dallas hedge fund manager who has joined Forbes magazine’s list of billionaires because of his bullish bets on energy prices. Pickens predicted a year ago that $100 oil would probably occur by now. Today he is looking for $80 within six months, and he says growing chaos in Iraq would be a bad sign. ‘That could run prices pretty high,’ he said.

“Goldman Sachs’s Currie also notes similarities to a year ago, with global inventories at about the same level and U.S. government data showing an increasing bet on higher prices.

“‘At face value, this market is strikingly similar to a year ago,’ Currie said. ‘What is different? Supply is down a million barrels a day, demand is up a million barrels a day. The market is in a deficit.’”

If Bush is dumb enough to invade Iran, $200 could come in a hurry. But the idea that oil surges on a U.S. pullback from Iraq is debatable. The sooner we leave Iraq, the sooner Iraq will recover (I might add, just as Vietnam did), and the less jet fuel we will be wasting on needless missions.

Could there be a short-term spike when we leave Iraq? Perhaps, but the long-term benefits of us getting the hell out will be enormous.

Gasoline Demand Is Inelastic

It’s not so much that “high prices are acceptable to the American consumer,” but that the demand for gasoline is relatively inelastic. Consider the plight of taxi drivers and the Chicago Tribune article “Pinched Taxi Drivers Hope to Fare Better by Organizing”:

“His fares for the last two days were dismal, and now halfway through the day, Khalid al Hag had only $20 in his pocket.

“At this rate, he figured he would have to dip into savings to make his $520 weekly payment to the cab company for use of the car.

“‘I’m going to have to work at least 12 or 14 hours today and still I won’t get by,’ he said, gulping down a meal so he could get back into his cab, which lately he has been driving seven days a week.

“Other cabbies — independents who have to pay out of their pockets for gasoline and other expenses and benefits — flitted through the restaurant with the same laments. At $3.46 for a gallon of regular gas, high fuel prices are swallowing their thin profit margins…

“The drivers’ distress is why [Prateek Sampat, head of a taxi worker organizing project] thinks an effort to organize many of Chicago’s nearly 11,000 cab drivers, including 2,500 who own their own cabs, will succeed. Similar efforts are ongoing across the country.

“The organizing efforts are more of a cry for rights and recognition waged largely on behalf of thousands of immigrants who have quietly slipped behind the steering wheels of most of the nation’s cabs.

“Why are cabbies the focus of organizing efforts? Taxis are today’s Ellis Island for many immigrants, statistics show. And cab driver is the first line of work in the U.S. for many without good language skills and without credentials to land easier, safer, and better-paying jobs…

“The last fare hike in Chicago was in 2005. Soon after that, Chicago ranked 18th out of 23 cities in the U.S. for the price of an average cab ride, according to an industry study that city officials said still is relevant.

“The organizers presented figures compiled from a handful of drivers, showing that the drivers were spending an average $44 a day on gas last month and were earning $6 an hour when all of their expenses were deducted.

“But Ald. Thomas Allen (38th), chairman of the Committee on Transportation and Public Way, said he doesn’t sense any support within the City Council or from city officials for a surcharge. ‘Gas prices have kind of settled,’ he added…

“‘Every day when I go home, I ask myself the same question, “When am I going to stop being a cab driver?” And every day I say I’m going find something better, but I can’t,’ grumbled Omar Shire, 29, a Somali refugee, who has been driving for the last three years in Chicago…

“‘I work 14 hours a day, seven days a week. That’s all I do,’ he said, his voice rising in anger, his eyes wide. The city does not limit how many hours cabbies can drive.”

Is there a real choice here? The bottom line is you have to drive and you have to eat. While one can cut back eating expenses by switching from steak to hot dogs, there is no cheaper substitute for gasoline.

Monthly Crude Trendline Still Intact

The weekly chart has had a few busted trendlines, but the monthly still looks great:


Those watching crude may also be watching the U.S. dollar index and the yen versus the dollar.

Let’s take a look.

U.S. Dollar Index


Yen vs. U.S. Dollar


Forex traders will note that the chart of the yen versus the dollar is inverse of normal trading pairs.

It’s now do-or-die for both the U.S. dollar index and the yen versus the U.S. dollar. Both currencies have been anemic lately, compared with anything else. The U.S. dollar is on the verge of collapse, and the yen is at lows compared with the British pound and the euro.

With trillions in carry trade bets riding on the outcome, the impact of a major breakdown in either currency could be very significant. Out and out disasters are most often in the direction of the prevailing trend. Here, two competing losers also are going head to head. Resolution should come soon. The U.S. dollar is going to eventually break hard but one must be on the lookout for a major headfake with all the stops in too obvious places.

Mike Shedlock ~ “Mish”

July 24, 2007

The Daily Reckoning