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Crude likely to drop: Morgan Stanley

"Like all bubbles this will burst at some point. What I don't know is if it will be here, at US$100 or US$120."

Kyle Cooper, director of research at IAF Advisors in Houston

Crude oil may fall after hitting a record of more than US$90 a barrel, a report by analysts at Morgan Stanley said.

"Crude oil prices have overshot their fundamentals and are likely to come down sharply," Eric Chaney and Richard Berner said in a report on Friday.

The firm raised its target for Brent crude oil to US$70 a barrel from US$59 a barrel for next year.

"Further increases toward US$100 are still possible, as the combination of lower-than-expected inventories, OPEC discipline, and renewed geopolitical tensions, robust Asian demand and a weak US dollar have worked nicely for oil bulls," the analysts said in the report.

US crude oil stockpiles in the week ended Oct. 12 were 7.8 percent higher than the five-year average for the period, the US Energy Department said. Prices rose to records this week because of a falling dollar and concern Turkey may attack Kurdish rebels in Iraq, which has the world's third-biggest oil reserves.

"I think we will see prices fall over the next month because of weak fundamentals," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "Crude oil inventories are healthy and evidence is growing that US demand is weakening."

Crude oil for November delivery fell US$0.87, or 1 percent, to close at US$88.60 a barrel at 2:54pm on the New York Mercantile Exchange. Futures reached US$90.07, the highest since the contract was introduced in 1983. Prices are up 5.9 percent this week, the biggest weekly gain since the week ended March 23. Oil is up 51 percent from a year ago.

On Monday, prices passed the previous all-time inflation-adjusted record reached in 1981 when Iran cut oil exports. The cost of oil used by US refiners averaged US$37.48 a barrel in March 1981, according to the US Energy Department, or US$84.73 in today's dollars.

Brent crude oil for December settlement fell US$0.81, or 1 percent, to close at US$83.79 a barrel on the London-based ICE Futures Europe exchange. Futures touched US$84.88 on Friday, the highest since trading began in 1988.

"Like all bubbles this will burst at some point," said Kyle Cooper, director of research at IAF Advisors in Houston. "What I don't know is if it will be here, at US$100 or US$120."

Total implied fuel demand in the US averaged 20.7 million barrels a day in the four weeks ended Oct. 12, up 0.2 percent from a year earlier, the Energy Department said on Wednesday. Consumption of gasoline and jet fuel were down from the same period last year.

The threat of a disruption in shipments from Iraq, Iran and Nigeria has helped bolster prices for two years. Turkey's armed forces are on standby to attack inside Iraq after lawmakers authorized military strikes against hideouts of the Kurdistan Workers' Party, which has waged a two-decade war for independence from Turkey.

"We are still going to hit US$100 before the end of the year," said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd in New York.

"I wouldn't read too much into the retreat today. Even in a bullish market we are going to get the occasional day when price move lower because geopolitical concerns wax and wane," he said.

Crude-oil and other commodities also rose over the past month because the US dollar has declined against the euro, enhancing their appeal as an investment. Commodities often move in the opposite direction of the US currency. The dollar advanced after touching a record US$1.4319 against the euro on Friday.
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