The expected has finally happened. Crude has breached the $100 mark — for the first time in history. As the New Year began to unroll itself, analysts have been pointing toward this ultimate eventuality. The pundits were on target — at least time. Analysts seemed to agree that crude prices would continue their erratic and upwards march in 2008.
Goldman Sachs, one of the most active banks in the energy market, raised its price forecasts for 2008 by $10 already on De. 12. The price could reach $105 by the end of 2008, a bank report said.
The London based Center for Global Energy Studies (CGES) however, sees an average of about $90 in the first half of the year and according to its chief economist Leo Drollas, a spike to $100 (in 2008) is very much a possibility, specially if a cold northern-hemisphere winter increased demand for heating fuel.
“There are conditions in which we would see well over $100 per barrel, such as a cool winter, tightness of OPEC supplies or non-OPEC supply not growing as much as predicted,” he said.
“We start 2008 with the lowest OECD industry stocks recorded in four years, resulting in upside risks to near-term prices, particularly in the event of a colder-than-normal northern-hemisphere winter,” upping their 2008 average price forecast to $82.
Oil’s record rally will continue into next year with prices averaging above $77 a barrel as tight OPEC supplies and Middle East tensions outweigh a slowing US economy, a Reuters poll showed last Friday.
The monthly survey of 36 analysts put the consensus forecast for US crude futures in 2008 at a record average of $77.62 a barrel, up $3.19 from last month’s poll. The average price for oil so far this year is $71.76.
The US Energy Department’s Energy Information Administration (EIA) estimated oil prices to average nearly $85 a barrel in 2008.
“Judging by OPEC’s unwillingness to advocate an increase in output after crude oil traded at $99 a barrel, it looks like high oil prices are here to stay,” said Merrill Lynch in a research report.
“There’s a good chance this week we’ll see some record highs,” Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Ill., said last week.
“We might witness crude prices going up to $120-130/b next year if there are actual supply disruptions from countries such as Iran or Iraq,” Ken Koyama, director of strategy and industry research at the Institute of Energy Economics, Japan, told reporters in Tokyo earlier the week.
This is part Koyama’s high-end price forecast for average NYMEX crude futures in 2008 of $90-95 a barrel, which is based on a scenario that includes lower-than-expected production increases from non-OPEC producers, worsening supply concerns and increased speculative funds in the oil market. There is a 25 percent probability of this scenario, he said.
Markets are indeed stretched. Even the news of assassination of Benazir Bhutto in Pakistan made traders nervous and prices registered a rise, underscoring the oil market’s strength at a time when the outlook for the broader economy is weakening. This was the third time in two months that oil futures have made a run at the psychologically significant $100-a-barrel threshold.
And interestingly this happened despite the fact that Pakistan is not an oil heavyweight, either in production or consumption. It pumps about 60,000 barrels a day, according to the US Energy Information Administration. It consumption seems approaching half a million barrels a day.
Oil prices ended 2007 near $96 a barrel, or 57 percent higher than where they began at the beginning of the year.
Oil reached a trading record of $99.29 on Nov. 21 and remains close to the range of inflation-adjusted highs set in early 1980. Depending on how the adjustment is calculated, $38 a barrel then would be worth $96 to $103 or more today. Crude futures averaged $72.41 in 2007, compared with $66.25 in 2006, and had their biggest percentage gain since 1999, when prices more than doubled to $25.60 a barrel.
However, despite the strong crude markets, since August, the Bush administration has been adding 50,000 barrels a day to the Strategic Petroleum Reserve, with plans to kick up the pace to 70,000 barrels a day by the end of January. This also seems to be impacting the market.
That US oil tank of last resort now contains 695 million barrels of oil — enough to keep the American economy running for just 56 days. And this binge buying by the US government has added as much as 10 percent to the price of crude, an oil consultant told a Senate panel recently. What’s more, in the recent energy bill passed by Congress, President Bush asked — and received — authorization to double the size of the Strategic Petroleum Reserve.
With the global economy is growing at about 4.5 percent per year, and despite storm clouds on US economy, from Brazil to Singapore, oil markets are in for upward movement.
The world’s population is trading bicycles for cars. With 14,000 more cars on the road each day, China’s oil demand alone is expected to rise at least 5 percent this year, the International Energy Agency (IEA) said.
As a result, the IEA projects in its Medium Term Oil Market Report that global oil demand will grow 2.2 percent a year, on average. By 2012, demand should reach 95.8 million barrels per day (bpd) vs. 85.7 million bpd this year.
However, not every one agrees to that the crude markets would continue bullish. Some are starting to argue that slow global economic growth, particularly in the US, could help temper price gains. “I do have some concerns about demand,” said a Washington-based analyst for oil consultancy PFC Energy, David Kirsch
“The global economy is weak ... and that’s going to be the worry that potentially keeps you from $100,” he said.
Kirsch however, emphasized that the “financialization of oil”, or the use of oil as an investment product for speculators and even pension funds, was a key theme of 2007 that was set to continue in 2008. “It started late last year. We’re now seeing different types of investors,” he said. “Before it was primarily hedge funds; now we’re seeing pension funds, which are very conservative investors, taking long-term positions in oil as part of a larger portfolio strategy.”
With bulls reigning, the $100 era is finally here and likely to stay for at least some time to come.