Oil Prices Above $110 -- Is $115 a Sure Thing?

Crude oil prices showed no sign of slowing down on Thursday, with the price of US crude topping the $110 mark, making quick work of the move up from $108 to the next psychological threshold.

US crude settled at $110.30 on Thursday afternoon, up 1.35%, and hitting another new two-and-a-half year high harkening back to September 2008.

Low Gas Prices May Not Benefit Obama

All Eyes on Europe, Jobs Report in Coming Week

First Niagara: Financial Winner

Brent crude was holding its ground above the $122 mark on Thursday, up 0.5% and recently trading at $122.52.

There were a variety of potential reasons for the continued spike in oil, at least as far as short-term triggers on Thursday, including another earthquake in Japan that supported the argument for even more use of traditional fuels from the battered island nation. There were also reports of Libyan oil fields on fire, which some traders pointed to as a reason for the latest spike in crude oil prices.

Yet equity and commodities analysts were coming back to the technical trading and psychological triggers for action in digesting the latest move up in crude.

The comparison between the fresh highs in the price of US crude versus the Sept. 2008 crude oil prices before the financial crisis ensued isn't just an academic exercise, according to Phil Flynn, market strategist at PFG Best.

The PFG Best strategist, who recently bet on the move up from $108 to $110, said there could be a short pause here, but likely only a short pause -- as was the case before crude oil moved up from $108 to $110. The next key level is $111, and it's key because if crude oil can hold $111 it makes a long-term target of $120 a more reasonable assumption. "That's not a crazy prediction, that's a technical prediction," Flynn said.

The PFG Best strategist said the last time the oil trade and the market was in this territory was back in September 2008. "Technical trading follows the saying, 'You meet the same people on the way up as you do on the way down'" Flynn said. "You get the same resistance on the way up as on the way down," he explained.

During the week of Sept, 26, 2008, US crude oil hit $110.31, and that was the "last gasp" rally for crude oil before it tanked and the largest peak to valley trough in the oil market ensued. Flynn noted that after the summer of 2008 high crude price of $140, crude tanked and it was only in late September 2008 that crude oil rallied before heading even lower. "In September 2008, crude oil failed miserably at holding the $110 level, and so is this the last gasp of a bull market, the last resistance point before we pull back?" Flynn asked. He concluded that if oil moves up to $111 from here it's an important milestone.

There is also the $115 crude oil price that serves as a psychological threshold -- at least as good as any -- for the demand destruction that both equity and oil traders worry about as signaling the end of the run.

Chris Martens, energy equity trader at Oppenheimer & Co., said the $115 crude oil price has been noted as the level to begin watching for retrenchment in equities. "$115 could be the real level where we see real demand erosion and that would push equities down. And with energy stocks 15% of the market weighting, energy stocks are caught up in the initial reaction to sell equities."

PFG Best's Flynn said that $115 is a reasonable crude oil price to choose as the trigger for demand destruction, though it's not a magic number, and he believes that how the crude oil prices moves up from here will be as important as reaching the $115 mark. "Demand destruction doesn't have to come like a thief in the night," Flynn said. The market strategist contends that if crude oil edges up to $115, the market can adjust, whereas if crude oil spikes to $115 and the market begins to fear a quick run up to $120, it could be problematic. He noted that in the five years prior to 2008, oil added about $10 per barrel per year. It was only when oil jumped from $80 to $90 to $145 that the damage was done. Airlines and trucking companies went underwater overnight.

"In this situation, I think the market is giving fair warning," Flynn said, though he added, "At $115, it will hurt but may not be a major detrimental impact. We could have significant profit-taking, which we haven't had yet." Looking back once more to Sept. 2008, the PFG Best strategist noted that on Sept. 5, 2008, crude oil was at $115.09.

The Oppenheimer energy equity trader Martens said that the market is well aware of the 10% to 15% premium built into oil prices and not based on seasonality, inventory, or any fundamental energy sector factor. Yet the Middle East and Northern African issues remain and aren't going away and summer driving season is on the horizon.

The main data points for the week were factored in, with a "non-event" US government crude inventory report on Wednesday.

PFG Best's Flynn added that reports on Thursday of Libyan oil fields on fire were another notable exogenous event, even though the Libyan production shutdown has already been factored in. A "scorched earth" policy that replays what Iraqi forces did during the first Gulf War in defeat could be yet another trigger for higher oil prices.

"The bias is to be long. No one wants to be short going into weekend, as long as there is no glaring reason, we continue to focus on the geopolitical risks and that's not going away," Martens said.

Energy stocks eked out a minor gain on Thursday as the broader equity markets declined. Exxon Mobil (XOM) paced the super majors with a 0.7% return on Thursday, while Chesapeake Energy (CHK) paced the independent E&P companies, up more than 2%. Oppenheimer's Marten said that the higher crude prices continue to favor the more "oily" names, and Chesapeake has been among the nat gas-heavy energy plays to transition to make the big transition to liquids.

Exxon Mobil, which has been criticized for its big purchase of natural gas play XTO Energy amid the historically low natural gas prices, was back on CNBC again on Thursday afternoon to defend the deal and discuss the rise in crude oil prices. Rex Tillerson, Exxon Mobil CEO, said that the continued rise in crude oil prices is a function of the market "pricing in what it thinks is going to be the cost of the next barrel that has to be bought in the event there is another interruption of supply somewhere else."

On the XTO Energy deal, Tillerson said, "I think the timing was good from our perspective. The current conditions were not unexpected by us... we're happy in the resource we have and in the organization we acquired as well... Our expectation is that demand for natural gas is going to be healthy in years to come. It's going to be extraordinarily important as a fuel source in the US and we are very happy with the resource position we have," Tillerson said.

Exxon's performance year-to-date is in line with peers, though it has trailed stocks including Chevron (CVX) and ConocoPhillips (COP) by a significant margin of roughly 15% in the last one-year performance period after the XTO acquisition.

The oil refiner stocks were the worst group performer on Thursday, though the group has set a torrid pace as the spread between WTI and Brent crude has benefited mid-continent refiners. There wasn't a major refining stock in the green on Thursday, with Valero (VLO), Holly Corp. (HOC), and Tesoro (TSO) leading the Thursday retreat, all down between 2.5% and 3%. Holly and Tesoro have risen 49% and 43% year-to-date.

The oil service stocks retreated for the second straight day, though the losses were marginal, with Baker Hughes (BHI) flat in Thursday trading, and Halliburton (HAL) and Schlumberger (SLB) down by less than 0.4%.

Oppenheimer energy equity trader Martens said that if there's going to be a major crack in the energy equities rally as demand destruction begins and equities sell off broadly, his first thought is the refiners, as input costs continue to go higher.

Currently, the energy trader says the E&P companies continue to hold up as long as the price of crude remains strong, but as earnings start in two weeks, the companies will need to show that the bump from oil prices can hold up over time. "It takes time for the higher prices to impact earnings, and then it needs to be sustained," Martens said.

The big move in the energy sector came after the closing bell on Thursday, when speculative shallow water drilling play Hercules Offshore (HERO) disclosed that it faces a Justice Department and SEC investigation alleging violations of the Foreign Corrupt Practices Act, which focuses on illegal payments made by companies to business interests in foreign countries and to foreign governments. Hercules Offshore shares, which as a high beta play in the energy sector can swing on any given day, were down 10% in after-hours trading.