Three Potential Roadblocks to Rising Oil Prices

Everyone knew it was coming. Oil prices are back on the rise.

Two days ago, the price of West Texas Crude Oil (WTIC) hit a three-month high. After plummeting from about $106 a barrel in early May to less than $78 a barrel in mid-June, spot oil prices have now climbed all the way back to more than $93 a barrel.

At this point, it seems inevitable that oil is headed back above $100 a barrel, where it was for nearly the entire first five months of 2012.

But nothing in the investment world is inevitable – especially in a marketplace this volatile. Headwinds are everywhere, and some of them could stand in the way of an extended oil rally.

Here are three potential roadblocks that could slow oil’s ascent in the coming months:

  • Weakening Economy. Europe is still a mess. In the last 48 hours alone, Greece narrowly escaped a default through a bond sale, and rumors surfaced that Spain may require another bailout. Those factors likely played a role in the International Energy Agency’s decision to cut global oil demand forecasts for the remainder of 2012 and all of 2013. The French-based agency estimates that growth in global oil usage will slow to 0.9% next year from 1% this year. Global demand isn’t likely to increase greatly while the European debt crisis continues to rage. If most euro-zone countries can’t even afford to pay their own bills, how can they possibly afford oil if prices go through the roof?
  • Japanese Nuclear Plants. Japan is just beginning to stitch itself back together 17 months after a devastating earthquake and tsunami leveled its nuclear power plant in Fukushima. The clean-up could take decades. It will take until at least the end of next year for Japan to fully reactivate its nuclear power. That will continue to limit oil capacity in the world’s third-largest economy. Japanese oil demand is projected to decline 3% in 2013 as the country rehabs its destroyed plant.
  • Increased Production. The Energy Information Administration (EIA) estimates that oil inventories in the developed world will reach 2.62 billion barrels by year’s end, which would make it one of the highest year-end totals of the last decade. In July, global oil production was 2.6 million barrels per day ahead of where it was a year ago. With supplies growing and demand in some of the world’s largest economies slowing, that may put a short-term ceiling on just how high oil prices can go.

But that’s in the short term. If you’re an oil investor in it for the long haul, you shouldn’t let potential turmoil in the coming months force you out of your position.

It’s all but certain that oil will reach $100 a barrel again. Global debt crisis or not, demand will always be there. People still use oil to heat their homes and fuel their gas tanks.

Eventually, supplies will begin to dry up and economies will stabilize. Once that happens, there will be little preventing oil prices from reaching never-before-seen levels.

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