Is Crude Oil on a Flight to $80 a Barrel?

By Jason Simpkins

It appears that rising oil prices will remain a solid bet for investors – at least for the near future. Crude at $80 a barrel may be a reality sooner than we think.

Amid swirling concerns about oil supplies, crude oil futures closed at a record $78.21 a barrel on the New York Mercantile Exchange yesterday. Factors that fueled the jump include an increase in global demand, the resumption of violence in Nigeria, and ongoing uncertainty involving the Middle East, particularly Iraq.

A recent report released by Deutsche Bank suggested the demand for oil could increase 1.7% in 2008. The Paris-based International Energy Agency, or IEA, has also suggested that the 2008 demand for oil will rise by an average of 2.2 million barrels per day, up from 1.5 million in 2007.

Much of that increase will be attributed to China, whose oil demand is expected to rise as much as 5.6% in 2008. However, the nation will also play host to the 2008 Olympic games, which will put an added strain on its energy consumption. According to the nation’s energy bureau, China’s crude oil imports increased 11.2% in the first six months of this year.

Ongoing violence around the globe has also done its part to advance fears of supply shortages. Political turmoil in Nigeria was credited for a rise in crude oil prices just a few months ago, as hostilities between rebel groups (notably The Movement for the Emancipation of the Niger Delta) and the Nigerian government resumed. This resulted in an attack on a Royal Dutch Shell oilrig, and the abduction of a 3-year-old British girl on her way to school in Port Harcourt. And it was reported yesterday that a Nigerian construction worker has been kidnapped.

Nigerian oil production has fallen off by nearly 20% over the past two years as militants demanding control over the country’s oil revenue have attacked facilities and abducted workers. This hasn’t boded well for the United States, which is Nigeria’s No. 1 customer.

The Middle East has not been without its problems either, and with the prospect of an American withdrawal from Iraq becoming increasingly likely, the region is faced with the risk of becoming even more unstable than it already is. 

Also, the U.S. dollar has suffered a significant decline against most major currencies in recent months. That’s raised the price of dollar-denominated oil imports into the United States, and has given other countries a price advantage on those same dollar-denominated purchases.

Many investors are also speculating that an inventory report from the U.S. Department of Energy’s Information Administration due for release today (Wednesday) will show a decline in U.S. oil inventories. And if that wasn’t sobering enough, consider this: The peak U.S. driving season won’t even come to a close for another month.

As fears regarding the supply of crude oil continue to mount, oil prices will rise in kind: It seems as though $80 a barrel crude could easily be a reality before this summer ends.