The latest rally driving oil to fresh records is likely to face fierce resistance from supply-and-demand fundamentals before it reaches $100 a barrel.
Tensions between Turkey and Iraq combined with expectations of a winter supply crunch have helped fuel a wave of speculative buying that tipped U.S. oil to an all-time high above $86 a barrel on Monday.
But analysts say the current supply-and-demand projections may not support a rise into the triple digits unless geopolitical tensions erupt into an actual event that could disrupt supplies.
"It would take much more than what we currently see on the underlying fundamentals. It would take an event such as a major geopolitical event related to Iran or a flare-up of military activity on the northern Iraq border," said Jim Ritterbusch, president of Ritterbusch & Associates.
"Right now it is difficult for me to make a case for that kind of a rally, and if we did see that kind of rally it would be short-lived and represent a speculative bubble."
Oil's climb on Monday was supported by rising tensions between Turkey and Kurdish separatists in northern Iraq that have dimmed the prospects of a recovery of Iraqi oil exports from the region.
The situation added to analyst worries lingering since July that supplies may struggle to keep pace with the Northern Hemisphere's winter heating demand and push prices near $100.
"The latest rally is in some ways the market catching up with tightening fundamentals that could have been predicted months ago," said Antoine Halff of Fimat. "The market could have some steam left, although if you are forward-looking, the next step could be a retracement.
The potential tightness caught the eye of investors, who have already poured billions into oil and commodity markets over the past five years to cash in on surging prices, looking across asset classes to maximize returns, experts said.
"It is capital coming in. There's a certain amount of capital that needs to be deployed and some of it goes into equities and some of it goes into treasury bills and some of it goes into currencies and some of it goes into commodities," said Sarah Emerson, director of Energy Security Analysis Inc.
"When you get up to $90 you're going to have some people starting to take profits."
The price of U.S. oil may already have reached its short-term ceiling, the director of Terra Verte Trading LP said on Monday. "I'm thinking that $86 or $87 is pretty close to the top with the information we have right now," said Andy Weathers of the Houston-based fund.
Oil prices have more than quadrupled since 2002 as demand from China and other emerging markets stretched supply. But forecasts for tighter markets prompted OPEC last month to agree to hike production to help head off any winter shortfall.
Analysts said a drive toward $100 would likely trigger even more supply to help cool down prices, while seasonal refinery work could also help cap prices.
"It looks to us like oil is a $70-$80 commodity," said Adam Robinson, analyst at Lehman Brothers.
"We would expect additional oil from OPEC, Brazil and the Gulf of Mexico, combined with lower refinery demand for crude as the maintenance season deepens, to restrain crude oil price strength going forward."
(Reuters)