Oil Price Bubble May Have Started to Burst

A 3-percent drop in crude oil prices Thursday could be the first sign that energy's bubble is losing air in recognition of swelling U.S. inventories, analysts said.

While some analysts insist that high oil prices are here to stay, many believe energy futures reached the point the stock market did in early 2000 when the technology bubble burst when investors had ignored overblown stock prices in relation to company profits.

"The sky is falling," said Tim Evans, analyst with IFR Energy Services (search). "Sell sky."

"This is it. This is the dam break," said Ed Silliere, analyst with Energy Merchant Intermarket Futures (search). "I'd have to say the bull market is done."

Spiking oil prices have attracted enough imports to the U.S. shores in recent months to build stockpile levels to their highest since 2002 when oil prices were around $20 a barrel, to counter lingering fears of an imminent global supply shortage.

Oil prices have gone up 25 percent since the year began and stand 50 percent higher than they were a year ago.

Many analysts have predicted an end to the frenzy, which last week brought oil to a record near $60 a barrel.

Others say high prices for oil could be here for the long-term.

"I don't think we're going to see any significant or meaningful change any time soon," said Fadel Gheit, analyst with Oppenheimer & Co (search). "Oil prices will hang at their current levels or even go higher."

Fears of inability to quench the thirst of growing Chinese demand and the potential for terror attacks in oil producing countries have kept crude prices higher than the underlying supply-and-demand factors, Gheit said.

"A bubble is an unsustainable price situation," Gheit said. "That doesn't mean the bubble has to disappear. A bubble can last for a very long time. It can last 20 to 30 years."

China's oil consumption is expected to grow by 12 percent to 7.4 million barrels per day this year, the U.S. government said. It has become the world's second largest consumer of oil behind the United States.

Last week, analysts at Goldman Sachs (search) raised the upper end of their self-named "super spike" potential for crude oil, to up to $105 a barrel by 2007.

This prediction, the analysts' said, is linked to the fact that gasoline prices are lower when adjusted for inflation than they were in 1981, and that gasoline spending is not as large a part of the economy.

But that prediction has drawn some doubts.

"Without a cataclysmic attack on oil infrastructure, we're not going to get (to $105)," said Jason Schenker, analyst with Wachovia Bank.

"Even stating that crude could go to $105 is akin to the statements we saw in the late 1990s that the Dow was going to reach 20,000," Schenker said. The Dow index reached a top in January 2000 when it hit 11,750.

The United States, which consumes a quarter of the world's 83 million barrels of oil burned daily, has built supply of crude oil and gasoline are above normal, the federal government said this week.

Federal Reserve Chairman Alan Greenspan (search) Tuesday said high oil prices could eventually correct themselves lower by cutting demand and encouraging stockpiling.

If the bubble starts to burst, it could take time to deflate back to fair fundamental levels some have pegged in the $30 a barrel range.

It will take "several months to wring out the excess," said Evans.