Is Oil Actually Worth $100 a Barrel?

The price of oil continues to drive towards $100 dollars a barrel but what is it really worth?

Every time I read an article about the price of oil it seems the fundamentals of supply and demand are left out. The stories always mention some sort of potential problem that can happen: the potential for a conflict with Iran, potential supply disruptions, etc.

It seems every minor event that is bullish for rising oil is mentioned and any bearish factor is left out. There is always an oil trader or analyst quoted as saying the price of oil is going to go up. However, there is never a discloser about whether that trader or analyst is “long” oil and therefore has an agenda to see it go up.

The actual supply of oil inventories compared to the previous year or future years is barely ever mentioned.

I haven’t seen any mention in of oil inventories in the last few articles I read so I did a Google search of U.S. oil inventories. The top search result that came up was from a summary of weekly petroleum data for the week ending November 16, 2007. It stated “at 313.6 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year.”

It seems oil inventories are currently above average, but what about the future? The U.S. and world economies are predicted to slow down in the next year so the demand for oil should start to weaken. Also, the price of oil has been trading at historically high levels for a few years now. I would think more supply would be coming on line by now to take advantage of the high prices.

So why has the price of oil appreciated so much this year? I think most, if not all, of the rise is due to speculators that keep driving the price of oil up. I think traders have seized upon the momentum of higher oil prices and until there is a sentiment change, which I don’t think is too far off, I believe oil is going to trade at very inflated levels.

I remember when oil was trading at sixty to seventy dollars a barrel there was a “terror premium” of around fifteen dollars built in to the price of oil due to the conflict in Iraq and other potential conflicts in the Middle East. This “terror premium” never went away and who knows how much of a “speculator premium” is built into the price of oil currently.

I am by no means an oil expert but I think the current price of oil is trading at highly inflated levels and it seems the media that reports on oil has an agenda to keep it that way.

Discloser: I have no position in oil futures.

Comments

[A]

Two comments:

1) when you talk of "agenda" or conspiracies, nobody will take you seriously

2) I take all those inventory stats with a huge grain of salt. What I would really like to compare is US, or even global oil inventories as measured in days of demand. Look at that today and over the past weeks, months, years, decades and excluding the SPR. That will give a decent context of where inventories are or if they even matter. Whether we have 6 weeks of demand on hand versus 8 weeks would really be irrelevant. If the numbers show inventories are at 2 weeks or 20 weeks would be significant. I haven't been able to find data like that.

My .02

[huangjin]

I don't read to much into "agenda". The media is biased towards stories of high oil prices, just like they push bird flu pandemic warnings, as well as mainly negative economic news. The reason they do it is because it sells, and the question is: does it affect the market? You can find plenty of people making a case for lower oil, but you have to search for them. I think a better case can be made for the dollar. Have you seen anything positive published in the past few months, besides a piece in Barron's this weekend?

[sikarskie]

This is an excellent article and this is the first time i've seen one that represents the true issues. The SEC needs to get to the bottom of these inflated prices..Lawrence

[Mr. RealityCheck]

Mr Lyons....I think you should do a bit of homework before making blanket statements like this. It's a fact that over the past 30+ years the U.S. has been loosing control of its energy supply. Try looking up Hubberts Peak on Google and see what you find. In 1970 the U.S. hit its peak production at 9 mill barrels per day...today we are about 5.5mill. Many of the world's best analysts have already estimated global peak production is behind us too. Hubbert predicted the year 2000 and just recently Petroconsultants of Geneva predicted 2001(the top two experts in this field). There are currently 98 oil producing countries in the wolrd of whcih 64 are thought to have passed their geology imposed prod peak. 60 of the 64 are in terminal production declines. Does that mean that the world is running out of oil? No...not yet. But it does mean the end is now in sight. It also means we are running out of cheap pumpable oil that has fueled economic growth in the 20th century. By the way...the countries that hold all the cards by largest reserves)Abu Dabi, Iraq, Saudi Arabia and Kuwait....aren't exactly sending us birthday cards every year. But he real key to prices is that the worlds demand for oil is growing faster than oil production can increase...even with slower global growth. Let's just do one exercise. In the late 70's early 80's crude prices went from $1.35 to $35.00 per barrel..a multiple of 26X. That's an increase of 30% a year for 12 yrs. If you apply the same multiple on this past decade low of $10 per barrel....that would equal $260 per barrel. So if you think the prices are two high now....just wait.