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Market News

 July 24, 2006
$100 Oil Sure Bet, Rogers Says; Merrill Lynch Demurs

 London, UK (by Stephen Voss - Bloomberg) -- Jim Rogers, the co-founder of George Soros's Quantum hedge fund, says oil prices will reach $100 a barrel, possibly this year. Merrill Lynch & Co.'s Francisco Blanch says no way.

"Unless somebody discovers something very quickly and very accessibly, we're all going to be dumbfounded at how high the price of oil will go, including me", Rogers said in an interview in Singapore.
Fighting in Lebanon between Israel and Hezbollah forces, backed by Syria and Iran, helped send New York crude oil for August delivery to a record $78.40 on July 14 on concern the violence may spread through the Middle East, the region that produces more than 30 percent of the world's crude.

Not to worry, says Blanch, the head of commodities research at Merrill, the world's biggest brokerage. Oil supplies would have to stop from a country such as Iran, the second-largest Middle East oil producer, to drive the market higher, he said.

"It's unlikely we will see another price rally from here, unless the current conflict expands beyond its current borders", Blanch said in a July 17 interview in London. "You'd need physical disruptions, and large ones, to bring the price to $100. You'd probably need to lose Iran."

Backing Rogers

A growing number of Wall Street traders are siding with Rogers. Bets on futures contracts for $100 oil tripled in the past three months, helped by demand for fuel from China, the world's fastest-growing major economy.

Crude oil for September delivery fell as much as 93 cents, or 1.3 percent, to $73.50 a barrel in electronic trading on the New York Mercantile Exchange. It was at $73.60 at 4:11 p.m. London time, 25 percent higher than a year ago.

Oil has tripled in four years to more than $74 a barrel and gasoline pump prices have reached $3 a gallon in the U.S., threatening to damage economic growth. Rogers, who wrote the book "Hot Commodities" and is chairman of Beeland Interests Inc., says the rally will accelerate as supplies decline from aging fields and reserves become more difficult to find.

"Commodity investors looking for $100 oil will see it", said Philip K. Verleger, an economist who founded PK Verleger LLC, a Newport Beach, California-based energy consulting firm. Only a U.S. recession can stop the advance to $100 a barrel before the end of next year, said Verleger, also a visiting fellow at the Institute for International Economics in Washington.

Oil prices have also climbed because of pipeline attacks in Nigeria and concern Iran might cut exports to fight efforts to curb its nuclear program. Iran, which says it seeks nuclear energy for peaceful uses, has the world's second-largest oil reserves.

Low Probability

U.S. crude inventories are swelling as OPEC members pump almost as much as they can. U.S. oil stockpiles are about 10 percent higher than the average level of the last five years, according to the Energy Department.

Investment in new rigs and refineries is paying off, increasing the cushion of spare capacity that protects against shortages. The Paris-based International Energy Agency estimates OPEC's idle crude oil capacity will reach 4.2 million to 6.1 million barrels a day in 2011, up from about 2 million a day now.

Oil at $100 a barrel is "a very low probability", said Tim Evans, an energy analyst at Citigroup Inc. in New York. "The market and editorial focus is on the $25 upside risk to $100 rather than on the $25 downside risk to $50. That's the kind of sentiment more common at tops."

The $100 Benchmark

The $100 level became a market benchmark in March 2005, when Goldman Sachs Group Inc. analyst Arjun Murti wrote that "we believe oil markets may have entered the early stages of a "super spike" period, which we now think can drive oil prices toward $105 per barrel." The report indicated a range of $50 to $105 through 2009. Oil last closed below $50 a barrel in May 2005.

The number of contracts bearing the option to buy crude at $100 this year is 53,047, triple the amount on April 21. An options contract gives a buyer the right, but not the obligation, to buy commodity futures contract at an agreed price within a set time period. The figures are for the September through December contracts.

"$100 oil is not a ridiculous idea", Paul Horsnell, head of commodities research at Barclays Capital in London, said in a July 17 interview. ''It is a possibility'' should the Middle East conflict cut off supplies, said Horsnell, the second-best oil- price forecaster surveyed by Bloomberg last year.

Wouldn't Be Surprised

Louise Yamada, an analyst who correctly predicted in July 2004 that oil would reach $67 within ''months to years,'' said she expects oil to reach $84 a barrel in the ''short term,'' then keep rising. ''I wouldn't be surprised to see oil in excess of $100,'' she said. Oil was near $40 when she made her 2004 prediction. It reached $67 a barrel in August 2005.

Adjusting for inflation, oil exceeded $86 in early 1981, when Iranian production collapsed following the country's 1979 Islamic revolution, according to U.S. Energy Department data.

The first so-called ''oil shock'' was in 1973 and 1974, when inflation-adjusted oil prices rocketed fivefold to about $50 a barrel. It occurred after Saudi Arabia and other Arab producers halted exports to the U.S. The embargo, protesting U.S. support for Israel, resulted in American motorists waiting in long lines for gasoline.

Forecasts Rising

Barclays Capital's Horsnell and Kevin Norrish in January raised their 2006 New York oil price forecast to $68, including $72.20 for the fourth quarter, citing increasing risk to Iranian oil supplies because of the nuclear dispute. Goldman Sachs increased its 2006 forecast the same day, to $68.50 a barrel.

''Crude oil prices for the first quarter of 2007 are already trading at $80 a barrel, so to go to $100 would be the same as getting to $25 when oil was at $20, and there are a number of events that could do that,'' Horsnell said. Prices of $100 are not in their base forecast, he said.

Rogers said declining supplies from existing fields and a lack of new oil discoveries will drive prices higher.

''The bull market has about 10 or 15 years to run,'' he said. ''How high it's going to go I don't have a clue during that time, certainly over $100 a barrel or over $150 a barrel before it's over.''