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“The Last Thing Anybody Needs”: Crude Tops $105, Unlikely to Fall Anytime Soon

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

Crude prices pushed above $105 per barrel early Wednesday after U.S. Admiral Samuel Locklear said additional strikes on forces loyal to Libyan dictator Muammar Gadhafi will be launched in the "coming hours and days."

The BBC reports coalition forces launched new air strikes near Misrata, a rebel-held city in western Libya while Gaddafi loyalists "resumed their pounding of Zintan," near the Tunisian border. (See: Gadhafi Will "Probably Survive": Oil Up as U.S.-Led Coalition Starts to Fray)

With political unrest and military conflict spreading across the Mid-East and North Africa, oil prices have already risen 15% this year, and $100 appears to be the new floor.

"I'd loved to say it's the peak but it doesn't look like that," says Robert Powell, Middle East analyst at The Economist Intelligence Unit. "We don't expect the Middle East to settle down anytime soon [and] expect the price of oil to remain elevated for quite some time."

That, of course, will keep gas prices elevated, which Powell notes is "particularly tough on the U.S." because we don't have nearly as high gasoline taxes as in Europe.
"So people here notice any shift in oil prices," he says. "It puts up the cost for businesses and the man on the street, which hits consumer spending."

If the unrest spreads to Saudi Arabia then "all bets are off," Powell says, suggesting crude could "easily" rise above $150 per barrel in such a scenario. That, of course, would have a devastating affect on the economy, both here and globally. "People are not going to shop when they're putting so much money in the pump," he says. "This is the last thing anybody needs." (For an alternative perspective, see: Don't Worry About Rising Oil Prices, Altucher Says: "The Economy Will Shift" Not Stop)

The good news is Powell and other Mid-East experts believe extensive unrest in Saudi Arabia is a very low-probability event. In fact, he expects energy prices to fall in the second half of the year "because we are not expecting unrest in the Middle East to actually cause any major outages beyond Libya."

Looking beyond the political risk premium in crude, Powell says market fundamentals are "not too alarming," citing high inventory levels in North America, prospects for new supply from Iraq and Brazil in the coming years, and a view Saudi Arabia does have excess supply - a subject of some controversy among energy experts.

"There is plenty of supply, just a political story playing in the oil price at the moment," he says.

Aaron Task is the host of Tech Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com