What the “pros” say:“Projected WTI prices average … $86 per barrel in 2011.” USEIA’s Dec. 7 Short-Term Energy Outlook. NB: May be increased in Jan. 11 STEO due to higher actual Dec. prices.
“…this market is going as high as $120 to $130 by July… . It’s Inevitable.” Mark Waggoner, president of Excel Futures, quoted in Dec. 31 WSJ.
“Goldman Sachs, J.P. Morgan Chase and several other banks expect futures to reach triple-digits in 2011 as the global economy recovers.” WSJ
Upside Factors
Economic growth, which increases demand. (But higher prices will depress demand and economic growth.) Big countries to watch:
• US. Largest consumer of oil. Watch real (vs. Wall Street) economic growth (FedEx deliveries good proxy).
• China. By far largest source of incremental oil demand. May resume filling of its strategic oil reserves in 2011.
• India. Economic growth could top China in 2011, but weak infrastructure (roads, rail, airports, harbors) could damp oil demand increases. Higher global oil prices will further stress Indian budget through fuel subsidies.
Financial market pressures. Falling dollar, inflationary pressure, slowing rise in equities markets valuation, all make dollar-denominated, internationally traded physical commodities more attractive to investors.
• “Next year, some of the froth will come out of the other markets, such as metals, and head into food and energy.” Rich Ilczyszyn, Lind-Waldock broker in WSJ.
Downside Factors
China. Watch: anti-inflationary measures’ impact on China’s economic growth and efforts to address environmental problems by restricting automobile new registrations, driving.
Oil stocks. Major industrial country (OECD) oil stocks remain well above the five-year average. Despite drawdowns this winter because of cold weather and yearend 2010 inventory taxes, stocks are likely to remain high entering the 2011 driving season.
Oil output:
• Saudis most sensitive to impact of oil prices on industrialized countries’, especially American, economic growth. Will move to increase OPEC output as oil prices approach $100/bbl. (The International Energy Agency, Paris, expects OPEC spare capacity to drop from 6.14 million barrel per day in 2010 to 5.70 mmb/d in 2011, still a comfortable cushion.)
• Non-OPEC supply. The IEA projects an increase in non-OPEC supply of 0.62 mmb/d in 2011 (over 2010), meeting about half of IEA’s projected increase of global oil demand from 87.45 mmb/d in 2010 to 88.77 mmb/d in 2011.
BLACK SWAN ALERT !
If rising tensions in the Middle East lead to either an Israeli attack on Iran’s nuclear facilities or another war between Israel and Hezbollah, the sky’s the limit.
Or, another major oil spill, or a Saudi succession struggle, or …
My Call
Continued volatility with prices swinging between $80 and $110 per barrel. Prices likely to move toward or above $100 by the summer driving season, then level out.
