Morgan Stanley Analyst Sees Oil Driven To $150 By July 4

NEW YORK -(Dow Jones)- Strong demand from Asia will cause a short-term spike in oil prices to $150 a barrel by July 4, a Morgan Stanley analyst said Friday.

Oil prices took a big step in that direction Friday, with benchmark futures rising 5% and topping $134 a barrel in morning trading. A spike to $150 would significantly raise the risk of severe damage to oil-sensitive sectors.

Aviation executives have said even $125 oil wrecks the industry's business model, and chemical companies like Dow Chemical (DOW) have sharply raised prices to accommodate the soaring cost of petroleum feedstocks. Retailers and others who rely on consumers with budgets pinched by high gasoline prices are also under stress.

Airline shares plunged Friday, cutting short a midweek rally spurred by deep capacity cuts at UAL Corp.'s (UAUA) United Airlines and Continental Airlines ( CAL). UAL, Continental, US Airways Group (LCC) and American Airlines parent AMR Corp. (AMR) were all down more than 7% in late morning trading. Delta Air Lines (DAL) and Northwest Airlines (NWA) were down more than 6%.

Morgan Stanley analyst Ole Slorer said Asian countries are taking "an unprecendented share" of the world's oil. The strong demand from Asia, coupled with stagnant oil supply growth, "appears to be pricing out Atlantic basin consumers while at the same time driving Atlantic inventories to critically low levels," he told clients in a research note released early Friday.

The argument echoes that made by Goldman Sachs analyst Argun Murti, who has said it is increasingly likely oil prices could spike as high as $200 before enough demand is knocked out to rebalance the market.

U.S. lawmakers and regulators, unconvinced supply and demand fundamentals fully explain the oil price spike, are looking into oil markets for signs of manipulation and undue influence from speculators.

Inventories of U.S. crude oil are down by 35 million barrels since March, Slorer said, which is helping to drive the price of oil higher. Slorer said he didn't see a "quick fix" to the problem of higher prices, because he didn't see oil imports slowing by a surprising amount any time soon.

He also blamed the effect of oil subsidies in oil exporting countries, and didn't see them being abandoned by their governments despite international pressure. Subsidies mean consumers in high-growth countries aren't fully feeling the effect of rising prices, easing pressure that otherwise would force them to use less fuel.

Slorer said that the decisions of India and Malaysia to trim their fuel subsidies fueled a mistaken impression that other governments will follow suit.

Few governments that subsidize gasoline for their citizens will trim those subsidies and may even increase them, Slorer said, because most countries with gasoline prices lower than the U.S.'s about $4 a barrel are oil exporting economies. The revenue they get from shipping crude at inflated prices more than offsets the cost of subsidizing gasoline use by their citizens, he said. Plus, those governments feel an obligation to give some of the profits from higher prices back to their people, and one way they are able to do that is through subsidized prices.

"We reckon that higher price of crude will only lead to higher subsidies in oil exporting countries," he said.

The only subsidizing emerging economy that could potentially cut subsidies and have an effect is China, Slorer said, calling it the "wild card" in the situation.

-By Ed Welsch, Dow Jones Newswires; 201-938-5244; edward.welsch@dowjones.com