Friday, December 14 - 2007

Record oil price sets the scene for $200 next year

With many commentators now on holiday the record $75.78 oil price last week was almost ignored. Yet with the world economy still hot the scene is set for a powerful rally in oil prices and the equally inevitable price spike. So will we see oil hit $200 a barrel in 2007?

Saudi Arabia: Saturday, July 08 - 2006 at 09:30
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Nobody ever really knows the future. All you can do is extrapolate from past examples and look at the positive and negative factors and weigh up the most likely outcome.

Some oil companies like Shell have given up on market predictions - others like BP are on the record as seeing significantly lower prices by 2010. But sticking your head in the sand is equally not really an option, as anyone doing business in the Middle East or anywhere else, just has to take a view on where oil prices are going.

What we do know from the chartist's perspective is that patterns repeat in commodities markets, and that a multi-year price rise usually ends in a bell-shape with a sudden peaking towards the end. In the oil market this was last seen in the 1970s with the spike occurring in 1980 after the Iranian Revolution.

Chart momentumn

The charts also show how oil price momentum builds and price rises gradually get bigger and bigger. Therefore it would be reasonable to assume that $75.78 is a price point at the base of a bigger spike yet to come, with the oil price having gradually risen from around $20 over the past six years. The shape on the graph is just not a spike yet.

Oil is now close in nominal terms to the previous peak oil price in 1980. But the inflation adjusted oil price would be two to four times higher, depending on which misleading inflation index you choose to follow. So that would imply a rise to $160-$320 a barrel just to account for inflation, and $200 is on the low side as a forecast.

Economists are presently not factoring in any such possibility, and this oil shock to the financial system would have huge consequences. We are talking a Wall Street Crash and chaos in global financial markets.

For the Middle East there would be a sudden influx of hundreds of billions of petro-dollars, and most likely hyperinflation, which is already appearing in certain economies. There would then be a further spike to the real estate markets, and local stock markets would boom again far more quickly than anyone might believe this summer.

Reverse scenario

Now try to make the case for a rapid fall off in the price of oil back to something more in line with what oil consumers would like to pay. It is pretty hard to do. Chinese and Indian demand for oil is still surging, Western economies may be cooling but are still growing strongly and even Japan is looking up.

At the same time oil supplies are not growing much this year. All sorts of capacity strains are apparent from refineries to worries about major oil fields beginning to vanish, such as in the North Sea.

Capital markets are driven by greed and fear, and in the oil market the producers are greedy enough to want higher prices and consumers are fearful of securing supplies and will pay higher prices. In this context a major oil crisis is perfectly possible.

Peter J. Cooper Peter J. Cooper, Consultant Editor
Saturday, July 08 - 2006 at 09:30 UAE local time (GMT+4)

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This Article was updated on Saturday, May 26 - 2007
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