Analysts dismiss speculation that oil will hit $200 a barrel

SPECULATORS are betting heavily that crude oil will hit $200 a barrel by the year’s end.

Reports out of the US show that options to buy oil for $200 on the New York Mercantile Exchange rose tenfold in the past two months to 5,533 contracts.

That’s a record increase for any similar period, analysts said. The contracts, the cheapest way to speculate in energy markets, appreciated 36% since early December as crude futures reached a record $100.09 on 3 January.

Oil experts warned yesterday, however, that the speculators were likely to face a nasty shock as supplies in 2008 ease supply fears for the moment.

Paul Harris, head of natural resources risk management in Bank of Ireland, said oil at $200 a barrel by the year end was “overstating it a bit”.

However, within two to three years as peak oil output is reached prices will soar under supply constraints.

This year the price of crude will continue to rise but he believes it will not go anywhere near the $200 mark that speculators have targeted by the end of 2008, said Mr Harris.

“Significant new supplies of oil are due to come stream this year from Anglo and the Middle East” that will ease some of the pressure, he said.

In his view, oil that has been gong up in price steadily since 2002 will continue to rise, but will end the year at somewhere between $120 and $125 per barrel.

Analysts at Merrill Lynch and Co and UBS AG say the slowing US economy will lead to the biggest drop in prices since 2001, the options show some traders expect oil to rise for a seventh straight year. Demand will increase 2.5% in 2008, according to the International Energy Agency.

US inventories fell to a three-year low on December 28. Production from Mexico is declining and Saudi Arabia is behind schedule in opening its newest field.

“One hundred dollars a barrel is actually 14.9 cents a cup, so we’re still talking about oil being remarkably cheap,” said Matthew R Simmons, chairman of Simmons and Co International, a Houston-based investment bank that focuses on energy. Inventories “are tight as a drum and I don’t see how we get out of this box”, he said in a Bloomberg television interview. Demand clearly isn’t starting to slow down, he said.