By Jason Simpkins
Oil prices may be headed for $100 a barrel by the end of the year, after speculators successfully pushed crude oil prices through the $90 a barrel level late last week.
But many Contrarian Investors believe that – despite the continued strong worldwide demand for oil – prices are already over-inflated by speculators, and are slated to drop. The fact that prices fell back into the high $80s from the record levels last week is a strong indicator.
In short, speculative investors will be looking to drive the price closer to $100 a barrel by December. And Contrarian thinkers think oil is poised for a big letdown.
On Friday, crude futures hit $90.07 during intraday trading, before settling at $88.60 a barrel on the New York Mercantile Exchange, down 87 cents from their Friday opening. Prices have quadrupled since 2002 and are closing in on the inflation-adjusted peak of $101.75, reached in April 1980.
Prices are up 28% since August and 19% in the last nine trading days, despite the assertion of many analysts that the underlying supply and demand fundamentals do not support such a bullish trend. But proponents of higher oil prices cite soaring demand from emerging markets, a weak U.S. dollar, lower-than-expected inventories, OPEC controls, and volatility in oil-producing nations as factors that will continue to spur prices higher.
Now, according The Wall Street Journal, the already large existing number of options held to buy crude at $100 a barrel could also drive the price of oil higher. As of last Thursday, there were nearly three times as many options held to buy the December crude-oil-futures contract at $100 a barrel as there were to sell the contract at $80 a barrel.
According to the Journal, a large concentration of bets on options at certain levels can act as a magnet for crude-oil prices. As the options-expiration date approaches, traders try to push futures prices to levels where their options become profitable.
"We haven't seen the last shot above $90 because there are a lot of people betting on $100 oil," Starsupply Petroleum broker Justin Fohsz told Business Day. Many speculators are seeking refuge from a volatile stock market – a market prone to even wilder trading patterns because of the ongoing credit crunch and still-weak greenback – which they say have made oil futures a bargain for overseas investors.
But oil futures seem to be soaring to record highs every week, leaving some analysts wondering when the speculative bubble is going to burst.
"Like all bubbles this will burst at some point," Kyle Cooper, research director at IAF Advisors in Houston, said in recent media reports. "What I don't know is if it will be here at $100 or $120."
Alexei Kudrin, Russia's Finance Minister also believes the price of oil is destined for a correction. "Oil is significantly overpriced," he said at a briefing Saturday. "The price is at a speculative level and has heated up because of conflicts in oil producing regions. The jump in price is temporary."
"Based on our studies a realistic price is closer to $50 a barrel," he went on. "Taking into account inflation, oil will increase a little bit and will be at about $60 a barrel in 10 years."
Regardless of whether or not crude prices return from orbit, many analysts agree that oil at $100 a barrel is a foregone conclusion. The price of light crude fell 1.17% yesterday (Monday), to $87.56.
News and Related Story Links:
- Money Morning:
Record Oil Prices Continue to Push Canada's Dollar, Inflation.
- Money Morning:
Soaring Oil Prices, Debt Concerns Send Stocks Skidding Yesterday; Oil Spikes in Asia Today.
- Money Morning:
Oil Prices Slip, but a Rebound Could Be On the Way.
- Associated Press:
- China Post:
- Wall Street Journal:
Options Bets on Crude Could Pull Prices Higher.