The Inevitable $100 Oil (OIH, XLE)

Media reports today are noting a $100 print in oil trading, although we would caution that this appears to be a paper trade from the floor and not an accurate market trading print.  We inquired with another agency and with an oil trading group in Houston and the "$100 OIL" appears to be mistake.  Neither could confirm electronic trading at that level.  The flip side of the argument is that it’s irrelevant as we’ve already hit record prices today.

On last look we saw oil up $3.32 at $99.30 per barrel and that was on the real market. We are over $99.00 and the mystical $100 oil is a mere difference in semantics at this point.  In fact, we’d now expect that oil could see a real $100 trade this week because the traders are more in control of oil prices than the fundamentals.

We’ve already got T. Boone Pickens maintaining $100 oil and he’s been right the entire run up so far.  Ken Heebner is also sticking with his oil names.  Oil has a large geopolitical risk premium assigned to it.  The exact amount is unknown.  Some feel the premium is $10 per barrel, and others have a $30 suggested premium.  We won’t even try to claim the answer if oracles like T. Boone Pickens can’t put an exact price on it. 

But what we do know for sure is that the Gulf of Mexico has largely escaped any real damage for the last two years from hurricane season.  We have had no steady net oil delivery misses at terminals throughout the Middle East, and depending on who you talk to the argument is that Iraq is close to being back on-line as a decent producer.  Russia and others are becoming more prominent players and there is enough oil from the Canadian oil sands that is much more than feasible at levels anywhere remotely close to today’s prices.

Imagine if Pakistan was a key oil player.  Imagine if Chavez in Venezuela could make more than a sting.  Imagine if we have an active hurricane season.  Imagine if our pipeline explosion seen last month was much larger.  Those geopolitical risks are there and we are up at $99+ with no significant supply issues.  A real oil trade at $100 is less than 1% away and at this point seems inevitable.

The Oil Services HOLDR’s (AMEX: OIH) are up over 1% at $191.20, yet the highs there over the last year are $204.62.  The more liquid Energy Select Sector SPDR (AMEX; XLE) are up marginally by 0.3% at $79.65, and the highs there over the last year are $80.60.

How much higher oil goes is anyone’s guess.  The case for much lower oil is a recession, so maybe high oil prices aren’t all that bad.

Jon C. Ogg
January 2, 2008