Some See Oil At $150 a Barrel This Year

A growing number of oil-market watchers say voters riled by soaring fuel costs may face far worse this summer, as factors ranging from unrest in Nigeria to slumping production in Russia could shove benchmark oil prices over $150 a barrel.

U.S. benchmark crude notched another record Tuesday, settling at $121.84 on the New York Mercantile Exchange. Nymex crude oil so far this year is up 27% and is now 17% above its previous inflation-adjusted record in April 1980. It is up 96% from a year ago.

Oil's seemingly unstoppable surge has led some analysts to issue gloomier price outlooks. Goldman Sachs Group Inc., which predicted the latest run-up, says the world may face a "super-spike" in which crude ranges from $150 to $200 a barrel as early as October, up from just over $120 now.

"That would put oil at unprecedented price levels, even going back to just after the Civil War," said Stephen Brown, an energy economist at the Dallas Federal Reserve Bank. A sustained price of $150 a barrel, he estimates, would shave around 1.8% percentage points off U.S. economic output in the first year, and a further 1.5% in the second year. The U.S. economy in the first quarter grew at an anemic 0.6% annual pace.

At the pump, $150 oil translates into gasoline prices of more than $4.50 a gallon, putting further strain on U.S. auto makers, airlines and utilities. It would also stoke the political debate in Washington. Regular grade gasoline in April averaged $3.46 a gallon.

Oil watchers say most signs point toward a continued increase in prices. Despite talk that speculators have driven up crude prices as a hedge against the slumping dollar, oil has rallied 10% since the first week in April while the dollar has risen about 2% against the euro.

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Even more unusual is that oil has maintained its upward momentum in the face of sharply diminished U.S. demand, which fell in February to 19.7 million barrels a day. That was down a million barrels a day from the 2007 average. An increase in U.S. demand, perhaps driven by the $152 billion in government stimulus payments to consumers, could crimp an already tight international oil market.

The main factors that could send prices down, analysts say, would be a sharp downturn in global oil demand or some sudden flight from commodities among international investors.

"It's not that the genie is out of the bottle -- it's that 100 genies are out of the bottle," said Daniel Yergin, chairman of Cambridge Energy Research Associates. Normally known for optimistic forecasts of lowering oil prices, Mr. Yergin's firm now says the price could rise to $150 a barrel this year.

The world's diminished spare production capacity remains the strongest single catalyst for high prices, Mr. Yergin says. The world's safety cushion -- the amount of readily available oil that could be pumped in a moment of crisis -- is now around two million barrels a day, according to most estimates. That's just 2.3% of daily demand, and nearly all of the safety cushion is in one country, Saudi Arabia. Everyone else is pretty much pumping all they can, which makes the world vulnerable to political or other shocks.

The oil market has become all the more skittish amid a raft of gloomy news from big oil producers. Indonesia, a longtime member of the Organization of Petroleum Exporting Countries, says it may pull out of the cartel next year as its production continues to fall to less than half its peak of 1.7 million barrels a day in the early 1990s. Indonesia has been a net oil importer since 2004.

In Nigeria, a series of militant attacks on energy infrastructure and an oil workers' strike that ended last week have added to the country's reputation as one of the most unreliable oil suppliers. Sabotage has shut down at least one quarter of Nigeria's effective pumping capacity of 2.5 million barrels a day.

The world oil market has also learned to be disappointed with non-OPEC producers, as underinvestment and aging oil fields in places such as Mexico and Russia have crimped crude production.

Non-OPEC production may grow this year by about 1%, below many analysts' expectations. The Paris-based International Energy Agency, funded by consuming nations, in April again cut its 2008 non-OPEC supply outlook for the year, this time by 85,000 barrels a day to 50.5 million barrels a day.

OPEC has kept its production target unchanged for eight months and has rebuffed calls for more supply even though crude prices have increased 54% since the 13-nation group last raised its production target at a meeting in September. Saudi Arabia, the cartel's largest supplier by far, has sent strong signals recently that it doesn't see adding additional production capacity beyond 2009.

"We believe that the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent," Goldman Sachs said in a note to clients. The bank said oil could hit an average of $200 a barrel next year, a prediction that would have seemed outlandish just months ago.

The U.S. Energy Department now predicts that oil will average $109 a barrel this year, raising its forecast by $9 from last month. The government also raised its prediction for gasoline prices, saying they should peak at an average of $3.73 a gallon on average in June, 13 cents higher than its previous forecast.

Such forecasts have sparked a debate among the three major presidential candidates, with Sens. Hillary Clinton and John McCain calling for a gas-tax holiday over the summer to ease the pain for consumers. Sen. Barack Obama opposes the idea, calling it a quick fix that doesn't address the real problem.

Many analysts now contend that oil prices will fall only following a sharp and sustained drop in demand in the U.S. and other large consuming countries. So far, demand declines in the world's largest oil consumer, the U.S., have been more than made up for by increased consumption in China, Russia, the Middle East and elsewhere.

The IEA says Chinese oil demand will rise almost 5% this year and once again play the biggest role in driving global consumption growth.

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Write to Neil King Jr. at neil.king@wsj.com and Spencer Swartz at spencer.swartz@dowjones.com

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