Crude Oil Prices: Next Stop $200?

Last week, the West Texas crude contract rewrote the record book, going above $110 a barrel for the first time ever.

Because crude has come so far, so fast and shows no sign of stopping, at least one analyst is contemplating something that would have been almost unthinkable just months ago -- the possibility of $200 oil. And not at some distant point in the future. By the end of this year.

The prediction comes in the midst of a slowdown in the U.S. economy that is starting to weigh heavily on the domestic demand for crude. In fact, some analysts are saying that the U.S. is now in a serious recession that will soon spread overseas.

$200 Oil: Could It Be?

That crude oil prices appear impervious to supply and demand -- domestic crude inventories have risen for nine straight weeks -- has subverted textbook economics and left analysts and traders stupefied. However, betting on a correction in prices has been proven wrong so consistently as to render traders unable to follow their instincts.

Meanwhile, energy stocks have been falling. Share prices for Total (TOT), Chevron (CVX) and Exxon Mobil (XOM) piggybacked on oil's strength through most of 2007, leaving them with 12-month gains of 13.4%, 23.5% and 19.7%, respectively. However, none of the three are dodging the current tumult in equity markets, and their stocks have all fallen roughly 6% so far this year.

Oil-service stocks are also tacking lower after advancing last year. Shares of Transocean(RIG) have fallen 5% in 2008 after climbing 77% last year. Baker Hughes(BHI), down 17.1% since the first of the year, posted a 16% rise in its share price in 2007.

E&P companies are faring far better and are leading the industry in 2008, likely because they will continue to drill wells whether the economy slows or not. Shares of Apache(APA) are up 8.8% so far this year, and Chesapeake Energy(CHK) by 21.7%.

Last week, an analyst at Goldman Sachs rocked the energy markets when he said that a major supply disruption or other news event could quickly send crude oil to $200 a barrel. In March 2005, the same analyst predicted that a speculation boom would send oil to $105 a barrel. The energy community guffawed at his call three years ago, but he was ultimately proven right. Investors are considerably more hesitant to ignore his prediction this time around.

According to Stephen Schork, principal of the Schork Group, it is hard to argue against the claim. "The oil market has been hijacked by speculators and has entirely decoupled from market fundamentals," he said. "Goldman was the first to call $100 oil. They could be right this time too."

Oil is well supplied in the U.S. now, according to Schork, and gasoline and diesel inventories are at their highest since the early 1990s. "Those figures don't support a bullish position for crude oil, and yet advancing crude prices have been relentless."

John Person, president of NationalFutures.com, agrees that oil could double in price again this year. "If the price of oil continues to grow at its current rate, it could be selling for $187 a barrel as soon as September. The important question to be asking now is whether that price is sustainable without having a disastrous impact on the economy."

However, Phil Flynn, senior trader at Alaron Trading, doesn't think that the high price of oil will last.

"I think we will see $80 a barrel oil before we see $200 a barrel oil," he said. "I give it three more months before the bubble bursts. I've been bullish on oil longer than most traders out there, but $100 oil without any regard to supply and demand means that a wicked correction is looming.

"The issue now is whether we see a sharp correction in oil prices followed by a resumption of the uptrend, or a correction followed by a major economic disaster," he added. "I very much hope that it is not the latter that occurs."

Flynn blames the runup in oil prices on the jaded values of the OPEC cartel. "While the U.S. is addicted to oil, OPEC is addicted to money. They are spending money faster than they take it in. By not increasing production at its [last] meeting ... it failed to let the steam out of the overheated oil market. OPEC is focused on making short-term gains rather than insuring the long-term health of the energy market."

If OPEC fails to react to the current state of the oil market, it will ultimately pay a painful price, Flynn says. "There are already signs that demand for oil is slowing in the U.S. OPEC thinks that it can survive a U.S. downturn by focusing on high energy demand in emerging markets. However, it is only a matter of time before overseas demand retreats as well. When that happens, OPEC will be in trouble."

Adolpho Rueda, technical analyst at Natexis Bleichroader, also doesn't think that the price of crude can double in one year again as it did in 2007. However, he says that all major trends point to oil going higher.

"Between October 2007 and February 2008, crude oil traded sideways from $86 a barrel to $100 a barrel. I think it will do the same thing over the next two months. My two-month price target for crude oil is $115 a barrel."

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