Experts wonder where oil's tipping point is ENERGY

Oil's tipping point: Where is it?

With crude approaching $120, experts look for hints of decline

With oil less than a buck away from $120 a barrel, analysts are growing weary at trying to anticipate the tipping point that will bring prices down.

Some say a six-score price could prompt developed countries to pressure the Organization of the Petroleum Exporting Countries to increase production whether or not the cartel sees a need to do so.

Others say it's folly to predict a tipping point until the weak dollar stabilizes and strengthens.

Either way, analysts say, it's reaching the point where something's got to give.

"I'm hopeful that we are in the grand finale of this 2008 event," said Tom Kloza, chief oil analyst at the Oil Price Information Service in Wall, N.J.

The side effect of high crude prices most visible to consumers, the price at the gasoline pump, also is setting records — and for the first time this week it surpassed its all-time inflation-adjusted high.

Oil crossed that threshold several months ago. The federal government says the average U.S. price per gallon of gasoline hit $3.508 on Monday, nearly a dime higher than the March 1981 high of $3.41 in today's dollars ($1.42 before adjustment for inflation.)

That continued push also prompted analysts to speculate that oil's run-up is reaching its last rally.

Kloza said attempting to identify the tipping point is "pretty much an exercise in abstract thought."

Earlier this year, though, he compared $100 oil to the pre-dot-com bust Nasdaq stock exchange rally in 1999 and 2000, though he wasn't clear on whether $100 oil represented Nasdaq at 4,000 or 5,000.

"It is now clear that it represented the former, and not the latter, which represented the last throes of the bubble," Kloza said. "I hope $120 a barrel is the equivalent of the Nasdaq 5,000, which would put us in the last inning."

Crude for May delivery came within a dime of $120 a barrel Tuesday before closing at a record $119.37 a barrel on the New York Mercantile Exchange. The push came amid the dollar's fall to another low against the euro, which makes oil a cheaper buy for foreign investors.

Demand in China, India and the Middle East remains strong, while U.S. demand is flat or falling, awash in worries about a recession fueled by the credit and housing crisis and negative jobs data.

Geopolitical factors that raised concerns about supply in recent days include militant attacks on Royal Dutch Shell's oil operations in Nigeria that shut down 169,000 barrels a day of production; a pirate attack on an oil tanker near Yemen; and revelations that oil production in Russia fell in January and February.

Dollar called driving force

However, Addison Armstrong , director of market research for TFS Energy in Stamford, Conn., said the weak-and-weaker dollar is driving the ramp-up.

The Federal Reserve has slashed U.S. interest rates to aid efforts to stave off a recession.

The European Central Bank hasn't cut interest rates and hinted this week that it may raise rates to address inflation — which could widen the gap between the euro and the dollar.

"Until the dollar really stabilizes and turns, it's foolish to try to call a top in this market," he said. "This crude rally is all about the dollar."

Cushion of subsidies

Also, consumers in emerging economies like China and India where demand is strong haven't felt the pressure of high prices prevalent in the U.S. because their governments subsidize their gasoline costs, Armstrong noted.

"I think the tipping point really has to come when we see more significant demand destruction here in the U.S.," he said.

"The longer and deeper the recession in the U.S. is, there is a chance that begins to impact China's economy and India's economy and some others where we get a lot of imports. In a slowdown, we wouldn't be buying as much, and that could impact what is happening overseas."

For now, however, demand in emerging economies is more than offsetting slower demand in the U.S. and other developed countries, said Brian Hicks, co-manager of the U.S. Global Investors Resource Fund in San Antonio.

An OPEC increase?

And Hicks said $120 a barrel could prompt developed countries to pressure OPEC to "at least think about or consider" increasing production.

Top policymakers in Saudi Arabia, the world's biggest oil producer, have said recently the kingdom sees no need to increase output anytime soon. But International Energy Agency Executive Director Nobuo Tanaka said in a speech Sunday that OPEC should help boost oil inventories because prices are too high.

Hicks noted that OPEC has less spare capacity than in the past — now less than 2 million barrels a day — but there's room to talk about upping output with oil hitting its current level.

"That's probably at the point where you start to see global leaders maybe get involved," Hicks said. "It's becoming more and more of a headwind to the economy."

Kloza said $120 oil doesn't change his prediction that the average U.S. price for gasoline will range from $3.50 to $3.75 a gallon with exceptions in some areas, such as California.

He has said $4 per gallon gasoline isn't reasonable given the sluggish economy and underlying fundamentals of supply and demand.

"Let's hope so," he said Tuesday.

kristen.hays@chron.com