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April 20, 2012, 12:02 a.m. EDT
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By Myra P. Saefong, MarketWatch
SAN FRANCISCO (MarketWatch) "” Is oil really worth more than $100 a barrel?
That appears to be a big question on traders' minds since late February when oil futures prices on the New York Mercantile Exchange neared $110, which has so far marked the peak for the year.
And despite ongoing Middle East threats to global supplies and a complicated background comprised of market manipulation talk, government oversight proposals and pipeline changes and expansions, many analysts don't believe prices are where they should be "” simply because there's too much oil in the market.
Assistant editorial page editor James Freeman on President Obama's recent speech calling for the heads of oil speculators. Photo: Getty Images
"The economic price for (West Texas Intermediate) oil is in the $80-$85 range," said Mickey Cargile, managing partner at Cargile Investments, basing his estimate on where he sees supplies locally and in Cushing, Okla., the delivery hub for Nymex oil.
"Our range valuation suggests a 15%-20% risk premium priced for potential supply disruption from Iran," he said.
On Thursday, crude futures /quotes/zigman/2203141 CLK2 +1.31% settled at $102.27 a barrel. It's up 3% year to date, but down nearly 7% from a peak close of $109.77 on Feb. 24, according to data from FactSet Research.
"If it were not for some of the Iranian oil off the market because of sanctions and the fear of supply interruptions, the price could be lower," said James Williams, an energy economist at WTRG Economics.
/quotes/zigman/2203141 CLK2 103.61, +1.34, +1.31%
Demand in the Organization for Economic Cooperation and Development countries is "weak and Asia may not continue to increase consumption at the same rate it did in the past," he said. At the same time, "there is sufficient oil in the market."
Crude inventories of 369 million barrels in the week ended April 13 are "in the upper limit of the average range for this time of year," according to the U.S. Energy Information Administration.
Elsewhere, Europe and Asia have been hoarding supply in the last few months, according to Phil Flynn, a vice president at PFGBest. "The market and countries were basically pricing in and expecting war" with Iran. Read more about Iran price premium.
There's nothing in President Barack Obama's recent proposals for increased government oversight in the oil markets, or changes to the U.S. oil infrastructure "that will alleviate the supply glut to keep oil prices above $100 a barrel," he said. "If the Iran risk goes away, so too will $100 oil."
Middle East mayhemEarlier this week, oil prices fell with multilateral talks concerning Iran's nuclear program seen as constructive and negotiations set to enter another round next month.
"As a supplier of approximately 2.5 [million barrels of oil equivalent], Iran materially impacts global supply and corresponding price," said Michael Peterson, managing director of energy research at MLV & Co.
And "given Iran's strategic proximity to the Strait of Hormuz, escalating tensions pose a risk to nearly 20% of global supply. The significance and supply risk premium associated with the crude cargoes that pass through the Strait cannot be overstated," he said.
Iran had threatened to disrupt oil transport through the Strait in the wake of sanctions set by the European Union in protest against the nation's nuclear program.
The tensions and sanctions have contributed to a decline in production. Iran's output fell to 3.35 million barrels in March, down from 3.46 million in January, according to an Organization of the Petroleum Countries report.
"?If and when the Iranians sell their oil ... the market will look much more bearish.'
Michael Lynch, SEER
Overall, "political instability in the Middle East is a long-playing problem," said Michael Noel, senior vice president of Edgeworth Economics and a leading economist on retail gasoline price cycles. The latest escalation in tension with Iran goes back 50 years or more and conflict or potential conflict "somewhere in the region has never been far from the surface."
"As the region holds the majority of reserves and produces a third of world oil, concerns of supply reductions, boycotts, embargoes and conflict all have an impact on prices," he said.
/quotes/zigman/2203141 Add to portfolio CLK2 Crude Oil - Electronic (NYMEX) May 2012 US : U.S.: Nymex $ 103.61 +1.34 +1.31% Volume: 23,577 April 20, 2012 2:29p var embeddedchart1065553356Chart = new EmbeddedChart('#embeddedchart1065553356', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:CLK2'); jQuery.data($('#embeddedchart1065553356').get(0), 'embeddedchart', embeddedchart1065553356Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //}); Page 1 Page 2 var OB_permalink= 'http://www.marketwatch.com/story/oil-market-mulls-iran-infrastructure-politics-2012-04-20'; var OB_Template="marketwatch"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); } Comments on this story 185 Comments Most Popular Market SnapshotU.S. stock gains hinge on Apple, blue-chip results
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