Why $100 Oil Is the New $80

Mideast turmoil will continue to add a premium of around $20 per barrel

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Why $100 Oil Is the New $80

Since spiking back in January, the price for West Texas Intermediate (WTI) crude oil has roughly bounced between $100 and $110 as a slew of factors have kept prices elevated.

The global-standard Brent seems to be caught in a similar trading range as well. With such price floors in place, many energy investors are now wondering if $100-per-barrel oil is the new $80 oil?

Rising demand in a variety of emerging-market nations certainly is a major factor in global oil prices. As it is, production costs for E&P companies are steadily rising as they tap more unconventional sources to meet that demand. But that’s just one piece of puzzle.

The truth is that the U.S. is currently awash in oil. Advanced horizontal drilling techniques and the widespread adoption of hydraulic fracturing in rich shale fields such as the Bakken have unlocked an abundance of energy.

Stockpiles in the U.S. have risen to an 11-month high of 371.7 million barrels, and analysts predict that the number will rise over the course of the year. With such deep reserves, say a variety of analysts, a huge dip in prices is in store.

So what gives — and why is $100-per-barrel oil the new price floor? It’s all about geopolitical risk.

Given the U.S.’s abundant supply and dwindling demand picture, analysts predict that WTI oil prices should be closer to the $80-to-$85 range. When we last looked at the metrics behind pricing a barrel of oil, geopolitical tensions played a major part in determining that price. Well, the more things change, the more they stay the same.

Tensions with Iran continue to play out in the global energy markets, with the nation’s uranium-enrichment program at the center of the dispute. The OPEC member continues to deny allegations that it’s trying to build nuclear weapons and says it produces uranium to fuel nuclear reactors.

Because of concern that Iran is developing nuclear weapons that could strike Israel or other potentially sensitive targets, the U.S. and the European Union have imposed a variety of economic sanctions. But since Iran has been defiantly displaying its nuclear achievements, policymakers are considering even tougher measures.

At the same time, in response to the economic punishments, Iran has continually repeated threats to close the Persian Gulf’s vital Strait of Hormuz. The six-mile gap is major throughway for a variety of goods, and its closure could result in about a 20% reduction in the world oil supply.

As a major supplier to the world — Iran produces about 2.5 million barrels of oil equivalent a day — the recent sanctions have wreaked havoc on oil prices, causing a 15% to 20% price premium on cost per barrel. That premium isn’t unwarranted.

Iran is the third-largest exporter of crude (behind Saudi Arabia and Russia), and it was one of the original Gang of Five nations that founded OPEC in the 1960s. The nation has historically moved the energy markets — either a boycott of Iranian oil or an Iranian refusal to export oil has the same outcome: falling supplies and rising prices.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/why-100-oil-is-the-new-80/.

©2014 InvestorPlace Media, LLC

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