He's Baaaaack...Maybe

Todd Shriber
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Whether it is an intended or unintended consequence of the Federal Reserve's second go round with quantitative easing or just the belief that demand will really be there to support price, it looks like the phenomenon known as $100 oil could reappear sometime in 2011. Without the help of a crystal ball and with the European sovereign debt crisis applying some pressure to oil prices, few if any analysts are willing to even forecast a month when $100 will arrive, but plenty are willing to say it is coming back.

Earlier this month, Bank of America Merrill Lynch and JPMorgan Chase both proffered $100 oil forecasts. Barclays is also in the $100 oil camp and is even so bold as to forecast $137 per barrel by 2015. Goldman Sachs forecasts $85 oil at the end of this year and $100 in 12 months. Morgan Stanley also sees oil at $100 per barrel sometime next year and traders are showing a willingness to make that bet as well.

In fact, the return of $100 oil has become quite the sexy trade in the crude options market. The price of options to buy December 2011 futures at $100 a barrel jumped 14 percent on November 24, the largest one-day gain in three months, according to data compiled by Bloomberg. Open interest in that contract has surged 51% this year, according to data from the New York Mercantile Exchange.

The risk with the $100 oil bet is the same two-fold issue that has been the case for all of this year. First, despite a decent third-quarter GDP number, it is pretty hard to get excited about the growth outlook for the U.S. economy in 2011. The Federal Reserve has said as much and that is a big deal when it comes oil prices because the U.S. is still the top oil consumer in the world by a wide margin. Second, a bet on $100 oil is a bet on China and India too keep up their stellar rates of economic growth.

There is a flaw in depending on China and India to drive oil prices higher oil that bulls have a tendency to forget about and that is oil demand does not grow linearly with GDP. If it did, China and India would surely be consuming much more oil and prices would probably be closer to, if not over $100 per barrel today.

And that brings up the next point. In June and July of this year, the U.S. consumed roughly 19.3 million barrels of crude per day, according to the Energy Information Administration. China would have to essentially double its oil consumption to match the U.S. at current levels. India, Asia's third-largest economy, surpassed Japan as the world's third-largest oil consumer in the second quarter, but still the country consumes just over 3 million barrels per day.

India's consumption is expected to grow 40% in the next decade, so assume that India is gobbling up about 4.5 million barrels of oil per day in 2020. China's consumption has just about doubled in the past decade and even it doubles again in the next decade, combined China and India would not be consuming a lot more oil than the U.S. and that is assuming U.S. demand remains flat for 10 years.

Markets will do what markets do, but $100 oil in 2011 is far from a lock.