Are you ready for $100+ per barrel of oil?

$100 per barrel of oil? It seems unheard of a few years back when oil analysts and consultants were looking at certain scenarios which could cause a "super spike" in the price of oil. Now the possibility of seeing a triple-digit price could happen in the next several months.

Now this is not an attempt to generate fear or panic. It seem obvious that this was coming and if you had a general knowledge of our current oil demand and supply and the geopolitical scene, this scenario is bound to happen.

Checking the latest crude price, September futures are at $74.90 in New York today.

Additional disruptions of Nigerian or Iraqi supplies or a military strike against Iran can trigger the rise. Other factors include OPEC's decision on increasing production toward the end of the year; if demand remains unexpectedly high; refinery breakdowns and repairs; and chances of a hurricane hitting the Gulf oil region.

OPEC won't meet until September and its members have not called for a gathering before that month.

One surprise is that near-record fuel prices have failed to restrain global oil demand growth. Even though prices have doubled, but demand is still high. While gasoline pump prices are now averaging more than $3 a gallon across the U.S., it has not dented sales. The American Petroleum Institute reported a record 9.23 million barrels a day in the first half of this year.

Robert Ebel, chairman of the energy program at the Center for Stategic and International Studies:
"It appears that high prices are acceptable to the American consumer. People want the house with a yard and white-picket fence so they are moving further and further out of the cities. They have to just get up earlier and drive further."

Will demand falter if gas prices increase up to $4 per gallon?

Yet, other analysts believe $100 crude will not happen. An energy analyst at Citigroup believes that the prices do factor in a shortage or production gap.

Another analyst suggests that prices will go higher if the chaos in Iraq continues to grow.

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Obviously, oil prices will spike to $90-100 if the U.S. carries out military strikes in Iran or if the security situation in Iraq completely collapses. Even though there is high demand, OPEC is not in any rush. We must see if they will ramp up production in September because the effects won't start to happen until the end of the year. Another factor to take in account is the depreciation of the U.S. dollar. OPEC knows that increased production would reduce prices but with a falling dollar, the pricing is much lower.

According to data from the Bank for International Settlements (BIS), OPEC dollar deposits fell by $5.3 billion, while euro and yen-denominated deposits rose by $2.8 billion and $3.8 billion respectively. Russian placements of dollars went up by $5 billion, but most of their $16 billion additional deposits were denominated in euros. Percentage-wise for OPEC and Russia, dollar holdings decreased two per cent from 67 to 65 per cent in the second quarter. It may not seem that significant, but it could be considered a decreasing trend given the dollar's 20-month low against the euro, and a 26-year low against the sterling.

We are also in hurricane season till the fall, so if we get a strong one hitting the Gulf coast direct where 20% of the refineries are located, we are in a world of hurt. Plus with the usual repairs and breakdowns.

Related Link

Bloomberg.com - $100 Oil Price May Be Months Away, Say CIBC, Goldman

FT.com - Oil producers shun dollar