Get Used to Higher Oil Prices

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At $43 a barrel, where do oil prices go from here? Well, there are plenty of reasons to believe they won't keep going higher.

The rise from the high $30s to today's $43 is largely the result of the Yukos-Russian tiff. Although this game of crude brinkmanship is frustrating to the global oil market, the chance of actual supply disruptions is minimal.

Knowing the Consequences

President Vladimir Putin and his government know that reduced exports would be disastrous not only for Yukos, but also for the Russian economy and for global oil prices. Hardball tactics from the government also would have a chilling effect on future foreign investment, which is desperately needed in Russia to improve infrastructure and potentially boost production and exports.

Beyond Yukos, Russia's signals have been clear. Over the past two weeks, Putin has entertained ConocoPhillips ( COP) Chairman and CEO James Mulva and has encouraged BP ( BP) to look at various Siberian investments. The intended message is clear: Yukos is a tax matter and should have no bearing on the future of foreign investment in Russia.

The Yukos situation should pass, and oil prices are likely to head back to the high $30s in the next couple of weeks. However, don't expect a much greater retreat in the weeks ahead.

Other Risk Factors

There are simply too many possible "hot spots" in the world that could negatively impact supply. Potential troubles include sabotage in Iraq, security concerns in Saudi Arabia and other OPEC nations, strife in Nigeria, labor concerns in Norway, infrastructure and investment concerns in Russia, domestic capacity issues in Mexico, and civil unrest in Venezuela ahead of the August referendum. That's not to mention the overall risk of terrorism affecting global oil infrastructure.

Those factors and others make up the "risk premium" in the current price of crude oil. How big is it? Some say the risks have added $5 to the price of a barrel, while others say it's closer to $15 a barrel. Regardless of how big the risk premium is, the more important question is when the risk premium will go away.

I don't know the precise answer, but I can tell you that the premium won't just evaporate next week or even next month. It will probably linger at least through year-end, if not longer. When we can better define the end of these threats, we'll have a better idea of when the risk premium will begin to shrink.

Until then, an oil price in the mid- to high $30s is almost a certainty.

That's not even considering the demand side of the equation. The global economy is beginning to show slow, steady growth. The economies of China and India continue to accelerate, using more energy per capita in development mode than developed nations. One reason why imports haven't risen like some expected may be that increased OPEC production has been met by greater demand.

Most OPEC nations have little additional capacity, and demand seems to be taxing existing supply. That means there's little room for error in the crude markets.

And that makes expensive crude a reality for the next several months.

At time of publication, Edmonds was long ConocoPhillips, although holdings can change at any time.

Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to cedmonds@thestreet.com.

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