Feeling for Oil's Ceiling

When most energy analysts were calling for the price of oil to decline at the start of the year, Phil Flynn, vice president of Alaron Trading, was predicting it would climb to $40 a barrel.

If that seemed like a wacky estimate at the time, it's all too real today. This week, Nymex crude oil futures closed above $40 for the first time in 13 years, and were heading higher Thursday morning . So what is Flynn saying now?

Even though oil prices have risen 25% this year, Flynn believes they could be heading higher still, possibly to $45 a barrel before they begin to moderate.

"I think that $45 area is going to do the job and lighten up the demand a little bit," he said. "[But] I don't see a crash in oil prices. Forty dollars is going to be the new norm."

If true, that bodes well for energy stocks, which are already expected to post record earnings in the second quarter. It bodes less well, however, for consumer spending.

The rise in crude oil this year has surprised most analysts, who initially expected it to fall to around $24 in 2004 from $32.52 at the start of the year. Few predicted that demand would be so strong and supply so constrained. Analysts also underestimated the effects of continued unrest in Iraq.

Flynn said demand is likely to remain strong this year as the U.S. economy continues to recover and China's economy expands further.

"The Chinese government right now is doing everything it can to slow this demand for oil, and so far they haven't had any success," Flynn said. "There's a false assumption that the Chinese can curtail this tremendous demand for commodities ... you can't expect the bubble to burst tomorrow regardless of what the Chinese government does."