Is the summit near for oil prices’ 13-month steady climb?


Energy analysts have carefully watched the price of oil recently as it pulled itself out of the “comfort zone” of $70-$80 that we’ve discussed on this site ad nauseum. Analysts seem split on the short-term future of oil’s price because there are conflicting indicators and good reasons for both a rise and fall from the current price of around $85 a barrel.

The split is well documented in this great article in Bloomberg by Mark Shenk and Margot Habiby.

Shenk and Habiby point to the fact that options that will profit if prices fall in the next month are 26 percent higher than bets that oil’s price will rise, which is an astonishing number considering that oil has risen pretty steadily for the last 13 months. Shenk and Habiby also note that “Open interest in June $50 and $60 puts to sell at those levels exceeded 129,000 contracts on April 16, dwarfing the 50,000 bets on $100 a barrel. Puts account for about 56 percent of all June options contracts compared with 51 percent a year earlier.”

Not mentioned in the article is the seasonal rise in demand expected in the United States and elsewhere as summer travel grows. It’s for this reason that it we find it hard to imagine crude oil prices dipping to the 60-dollar range any time soon.

Dian L. Chu at take the same position.

“Crude Oil has one other factor that Gold and Equities do not have going for them right now. This is the heat of the seasonal summer driving season where the weather is much nicer, people take advantage of the nicer weather to get out and travel more, take vacations over the holidays, and use more gasoline in this April through July stretch. This seasonality dynamic causes prices at the pump to rise due to increased demand, which raises the price of Crude Oil in the process.”

But producers would be wise to keep oil’s price within or near the “comfort zone” of $70-$80 despite the seasonal increase in demand because the consequences of going too high above that zone are unknown and could be far reaching, particularly in an election year in the United States. Candidates will not hesitate to run against high gas prices and dependence on foreign oil, and Americans will be unhappy if their planned road trips or travel plans are costly due to high gas prices.