Crude Prices May Fall, Then Rise

11/13/2007 12:00 am EST


Peter Way

Founder and CIO, Peter Way Associates

Peter F. Way, editor of Block Traders’ Oil and Gold Monitor, says oil prices are inflated now, but worldwide supply/demand imbalances will drive crude higher in the long run.

No secret that crude is now at artificially high prices. The declining settlement prices out in time tell that.

But they don’t tell how that curve is likely to shift, up or down, between now and 2010. And shift it will.

The high forecasts for mid-2008 expirations (April through September) have tended to bunch up at the $80-$5 level, and are now around $90.

The long-term issue with oils is fairly simple. The worldwide imbalance of energy demand and the cost and quantity of findable and deliverable oil will continue to drive crude prices higher. The limit is the cost of alternative energy sources and the time it takes to make them available. Well-known, respected oil analysts put the balance point at a minimum of $150 a barrel, only a few years out.

And the further we go out in 2008, the tighter they see things getting. War and weather are passing events on the ultimate playing out of supply and demand.

Against this backdrop, any supply constraints are likely to be reflected in higher prices, at least temporarily. There always are refinery or delivery or weather problems that can be pointed to as the reason.

Right now one favored rationale is potential pipeline disruption as a result of Turkish-Kurdish border conflicts. It is not in the best interest of either side in that quarrel to have area pipelines damaged, so the odds of it happening are less. Actually, a far more serious condition could erupt elsewhere, and it may be starting to be factored into prices now.

That has to do with the Iranian nuclear development activities. The pretense that they have any peaceful purpose is an obvious sham to concerned governments, particularly the US and Israel. As the remaining term of the present US administration shortens, the odds that some forceful action will be taken increases.

Such action would likely prompt Iran to cause the sinking of one or more very large crude carriers that transit the Strait of Hormuz by the dozen every day. Those vessels, in restricted navigation space, are easy targets for even limited, unsophisticated attack methods.

A blockage of that waterway would cause an immediate and severe crude oil shortage, worldwide. Crude prices could double, quickly, if the interruption were to last more than a few weeks.

If the potential for another Crimean War subsides and is not replaced by a devastating earthquake, the big guns at the crude oil table see the lowest retreat of prices in the next few months back to a likely minimum of $70. But probably not for long if it does.

More likely is that we will have continued reflections of tightening supply and a trend of rising prices, with fluctuations as periods of ease are interspersed. They may provide buying opportunities.

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