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Forecasting (or Guessing) the Price of Oil

What will the price of oil be at the end of next year? Or next month?

It's hard to say and I generally try not to. That's why we're asking you, dear reader. But first, some background.

A comment on my last posting made a disparaging reference to a sentence in an article I wrote over the summer about oil prices. At the time, prices were just a bit off from record $147-a-barrel oil and I wrote that prices were unlikely to fall as low as they were for the previous generation.

And now...

There are good reasons why I try to avoid projecting oil prices. In the short to medium term, a geopolitical crisis, a bold OPEC production cut, a bigger than expected drop in U.S. consumption due to, say, a financial crisis (on top of price-induced conservation measures) and a decision by several big developing countries to lift gasoline price controls can all substantially change the price picture. Relatively modest changes in either supply or demand can produce big price changes; back in 1973-74, modest declines in supplies drove prices up sharply. On top of all that, huge flows of money in and out of commodities can magnify these moves.

One of the most important indicators of oil prices may be the amount of spare production capacity worldwide. That spare capacity had dropped to about 2 percent of world consumption earlier this year. Now increased production capacity from certain areas and falling demand has pushed that spare capacity to 5 million barrels a day or more, or close to 6 percent of world consumption. There's breathing room - at least for a while.

But for how long? That's another question.

That's why my vague formulation about future generations was about as specific as I cared to get in a series of articles prompted by the unprecedented spike in oil prices.

I covered the 1980s drop in consumption and prices for The Wall Street Journal, so I had a hunch that prices weren't going to stay at $125 or $145 a barrel. But they could have dropped to $90 a barrel (which would have been my best guess) or to $70 (which was the best guess of Phil Verleger, the Aspen-based oil economist, who I believe was the person who commented on my previous posting) and they still would have been higher than the prices the previous generation had seen. When I started covering energy again at the Post in April 2006, everyone thought it was a crisis when prices poked through the $70 a barrel level.

I can't pretend, however, that I expected prices to fall below $40 a barrel, as they did recently. How long lasting that might be depends on a lot of factors. How severe and how long will the economic downturn be? How much will Chinese oil demand slow (or even fall) as a result of the gasoline and diesel price increases of the past year? Will the summertime spike in oil prices leave people so scared that they will seek energy efficient cars even now that prices have tumbled? How much production will get shelved because prices are low?

Right now, oil is trading for $39.80 a barrel for February delivery - after OPEC production cuts are supposed to go into effect. But oil traders are putting an even higher price on it as the months go on, reflecting perhaps a belief that the global economy will start to rebound or that OPEC production cuts will start to bite.

So now it's time for you to say what you think. Go ahead. Tell us what you think the price of oil will be exactly three months from today.

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Comments (31)

raktims Author Profile Page:

I think President elect Obama's tax cut based on the stimulus package will have a relatively quick impact and will start producing result in terms of creating overall market based demand by the start of 09 summer. It probably won't be a steep upswing but will definitely a crawl upwards. If that happens, the world economy will also look up creating a moderate increase in oil demand. So I would predict $70-80 a barrel during summer.

stanassc Author Profile Page:

$70-$85/bbl.

The price of gasoline should be $3.00/gal. There should be a $1.50/gal tax to pay for the Iraq War that never paid for itself with confiscated oil fields. Want to use oil; pay for the DoD budget out of it.

TomfromNJ1 Author Profile Page:

I do not know, but I hope the airlines learned a lesson from Southwest and lock in futures at current prices and then get rid of the nonsensical nickel and dime charges they instituted supposedly to make up for high oil prices. Their hypocrisy is shown by the fact that they have not lowered them now that prices are well below what they were before they started crying about them. Supposedly they are now at a price where they can make a profit on just ticket sales. There should be government regulation to force their hand.

paultaylor1 Author Profile Page:

I predict that oil prices, and prices at the pump, will either be up in the near future or down. Furthermore, I predict that the long term prices will be up.

What we have learned about oil prices is that they have been, until now, almost wholly artificial, driven up quickly by greed. And when greed runs itself into the ground, as it has, it retrenches and waits again for a better day.

Oil resources do have a lifetime, and that time will come sooner than later as economies around the world build. By that time we will have more efficient oil consumption, as well as alternative energy resources.

johnstonrw Author Profile Page:

I have not owned a car for almost 25 years so am indifferent to the price of gasoline for my own sake. I do know that cheap gasoline encourages waste of a finite resource that could broadly be put to better uses than producing motor fuel. I already see drivers sitting by the roadside idling their engines while they wait for someone, or simply staying warm and reading a book in their SUV cocoon.
Sorry to bring you to reality folks, but the price of gasoline is not the most important measure of the quality of life today: the soundness of the financial system, the quality of health care, the long-term viability of our natural environment, the respect our nation earns, social justice and equality are. Suck it and up and buy a smaller car if you must drive, walk to the grocery store for that loaf of bread if it's less than a mile away, don't cruise the pretty neighborhoods to look at houses for sale, buy and use a bicycle and tell your neighbors to do the same, encourage the government to finance public transit the way all civilized governments elsewhere do; and above all tell your legislators you think motor fuel's price should reflect the damage its profligate use is causing. Then like me you won't have to worry how much gasoline costs.

Hodson2000 Author Profile Page:

I predict oil will be FREE by this time next year. Crazy, hunh? We'll see...

bobskis Author Profile Page:

I'll take a chance and predict US$67 per barrel in three months. That's high enough to sustain Mideast economies for a while, which they'll be maneuvering for, and I expect some price recovery once we're through with short covering and as summer driving season approaches. But that is too low to support a lot of high-cost new supply development (e.g. oilsands, deep offshore) and will mean a very sharp upward spike when demand again approaches productive capacity. How long that will take is anybody's guess. It will occur when demand destruction is exceeded by supply (investment) destruction.

shipfreakbo214 Author Profile Page:

Oil might be low, but don't bet on low gas prices. There is talk of raising the gas tax by at least 50% to pay for infrastructures, roads, etc. Enjoy these low gas prices.

mcleangirl Author Profile Page:

Oil should be nationalized, period. If the price then goes up a bit, who cares? At least it will stay stable and we can plan our lives around it.

mcleangirl Author Profile Page:

Last night when I came home from the big city gas was $1.42 a gallon at Quarles. Today it's $1.49.

shipfreakbo214 Author Profile Page:

If we can control speculation we have a good chance of descent oil prices, naturally supply and demand are a big factor, especially when the weather warms up. There was a lot of money made in the oil business due to speculation. I for one have no idea what oil prices will be in the future months, I don't think any expert can answer that question.

adod Author Profile Page:

The vicistidues of the world oil market in 200 was perhaps the story of the year and emblematic of a peverse psyche on Wall Street- to overshoot or undershoot the true value of the commodity. I can't say for certain what the true value of oil is, but what I do now is that's it less than what it was six months ago due to the demand destruction that has taken place. I beleive oil prices will trend upward over the next few months, maybe to $55-60, but not continuously. There will likely be a dip once the horrid christmas numbers are fully revealed to the public and then a bounce when the much-needed stimulus package is passed. What is clear is that if something isn't done shortly to reduce America's oil consmption, you will likely see a return to $100+ oil if the economy posts even modest gains- something that could imperil the recovery. Hopefully Obama will take thi into account in the stimulus package.

millionea7 Author Profile Page:

valued in gold, oil will not change. valued in USD$ oil will go up but only because the Fed is destroying the dollar.

to expect oil prices to rise heading into a global recession is insanity.

IdeologyKills Author Profile Page:

I predict in three months the cost to society and the planet of our insane dependence on oil will be three months worse than it is now.

Oh wait, you were probably talking about dollars.

ChiefV Author Profile Page:

Now would be a GREAT time to fill up the strategic petroleum reserve! I don't think we are well served in the long run by unusually low prices, so why not by lots of $40/bbl oil from our "friends" (i.e., NOT Iran or Venezuela, if that's possible), and top off those LA salt mines. Won't we be happy we did this in 1, 5, or 10 years when the price goes back up to $150/bbl?

SWadvocate Author Profile Page:

Most experts agree that we are at or near "peak oil", so as a nation, in our collective public and private endeavors, let's put our creative, proative policies and efforts into developing new fuel sources and alternate technologies to prepare for the day, not so far off, when we suck the last drop of oil out of the ground!

LansingMI Author Profile Page:

I think the oil companies will give us a little break with a new President coming into office. Since you asked for an exact price, I will say $58.60/barrel. I'm just glad you didn't ask for the price of gas; it has gone up $.35/gallon since Christmas here.

yousufhashmi1 Author Profile Page:

This is not a million $ but a trillion $ question.

I believe the prices will continue to be lower than 70 $

There are not one force but multi directional forces which are controlling the oil price.

Of course the biggest stake holder is OPEC but when the prices were rising they were behaving like an innocent child claiming they do nothing for increasing the prices. but they were the one who were maximum benefited.

The next are oil companies whose wealth increased three times over night but when i put his question to shell they say we know nothing about it.

Now comes middle man who makes the money. they are faceless people and no body interestingly tries to pin point who were benefited.

China and India are two countries whose rapid industrial growth was blamed for the demand of energy but they are not so fool to buy the energy on so such price where the end product become expensive.

So really we do not know exactly who played this game.

Why I think that the prices will be lower than 70 $ bench mark is that the renewable energy becomes competitive at 70 $ level which OPEC does not want to happen.

The PLUS G8 countries wants prices to be lower for their economic growth.

For political reasons a lower prices will benefit USA because then the Russia,Iran and Venezuela will not have surplus funds to think other wise.

The current lower prices is the reason for the pull to bring back the prices from 140 $ to 70$ . this is transitional face and soon the prices will be stable on 60 plus Minus 10 $

dwhittinghill Author Profile Page:

$60 to $75 at 1Q's end, rising to average $105 for the year. A key is to watch the March Mineral Management Service's scheduled lease of Zone 181 south. It has been estimated to hold the near equivalent in reserves of Saudi Arabia. The entire Gulf of Mexico basin geology is tilted in its direction and development (including 3D seismographic exploration) has already begun to describe the dispositions.
Norsk, Petrobas, and other foreign interests will be interested in buying into this field, and if it brings a billion or so in bids there will be a confirmation that has significant impact on 3rd world oil incomes.
Increasing world supply in U.S. dominated waters coupled with massive new natural gas findings on dry land will have the impact of stabilizing prices in the $50 to $100 range, but until these finds are brought to market the price should rise above $100.

gregor3 Author Profile Page:

Although we are seemingly experiencing a deflationary period, the numbers seem to show that the government and the fed have written in a good bit of inflation and/or drop in the international purchasing power of the dollar in the 6-18 time frame. Somewhere between "written in stone" and "can't happen" is my prediction of a 50% drop in the value of the dollar vs. oil within two years. It is hard to see how oil could be less than $80 or $90 in 24 months.

matk62 Author Profile Page:

I reference your story in a recent post on my blog:

( http://www.pay4rides.com/2008/12/oil-futures/ )

With gas prices we know that it is not IF they will increase, but rather WHEN. We need to take action now to ensure that demand stays low while we develop gasoline alternatives.

I hope prices remain low, but I would expect an increase to about $50 a barrel in 3 months.

DC-Oil-Analyst Author Profile Page:

You are absolutely right to focus on global surplus capacity as the only enduring correlation with price change. At 94% or 93% global capacity utilization, the oil system has enough slack that geopolitical risk and speculation lose their potency as price catalysts. Likewise, the growth rate of China's demand mattered more at the margin in a 98% utilization scenario than it does today. Surplus capacity even neuters OPEC because, even though the cartel can tighten supply, each incremental cut only adds to surplus capacity (if OPEC isn't producing it, it's not on the market), further stilling the reponsiveness of price to fundamentals and transient events.

Today, it would behoove price forecasters to watch the much-maligned U.S. driver - who represents about 11% of global petroleum demand. Price-sensitive motorists haven't been able to switch into higher-efficiency cars and the credit crunch has slowed the churn of older cars into newer, more fuel-efficient ones.

That could all change very soon if the Obama stimulus package funds a "cash for clunkers" program that retires low-income drivers' low-efficiency automobiles. Likewise, a resumed push for higher CAFE standards is in the cards.

$80 might well represent the upper-bound of any annual average range for CY09, CY10 and even CY11...


arjay1 Author Profile Page:

With about 900 million barrels already in tankers at $40.00 a barrel, the current world consumption rate should hold 'fairly' steady since there is no longer any profit for the world parasites or speculators. The price might increment upwards to about $52.00 in about three months.

Lets hope the American people don't forget that the LESS they consume, the better the price. If the Yankees (they were called that when they were thrifty) burned 90 million gallons less per day like they did in the summer of 2008, would that stretch out to keeping the price of oil below $100.00 a barrel for ten years?

gargoyle22 Author Profile Page:

All of the major oil producing countries of the world are hurting from the dramatic and sudden drop in the price of oil. These countries will welcome the least reason to raise the price of the product that is so vital to their economic well being. The Israeli attack on Gaza has aroused the fears of the world for various repercussions flowing from this dire threat to Middle East comity. Regardless of the actual effects of the Gaza "war to the death" as the Israeli government describes it, this extraordinary event is certain to cause immediate and rapid increase in the price of oil as speculators move to profit from the situation. Look for the price of oil to increase by an average of five dollars per barrel per day for as long as the conflict continues, with greater increases depending upon the action of all of those involved.

rasman Author Profile Page:

I would imagine that prices will stay the same for a few months within a range of 40-50 a barrell. During the summer months I think they will rise to up to 55 and then fall back to around 40 in September. We will have occassions during the time frame were spikes and drops will go beyond my range but the norm should hopefully be around there.

2 years later, expect 80+ again

jailkkhosla Author Profile Page:

$10 or less per barrel

WmarkW Author Profile Page:

I have no idea what the price of oil will be in 3, 12 or 120 months. And since my own consumption is inelastic (I don't have the option of cutting back if prices rise), I've bought commodity futures of crude proportional to my consumption for the next three years, to sell off some shares if the price goes up.

edbyronadams Author Profile Page:

This is exactly like asking to predict the state of the world economy three months from now. While I expect the US to muddle along and while we remain anemic, the rest of the world will be comatose. Therefore trading in the current range is the likely forecast.

The longer range is more interesting since the weak supply will act as a brake against further growth once it is robust again.

bfwebster Author Profile Page:

I think that the various financial pressures on Russia, Iran and Argentina are going to undermine OPEC's efforts to keep production low and prices up, much as in the early 80s. I think that oil will make a few runs at $60/bbl in the next few months, but I suspect that 3 months from now, it'll still be trading in the current $35-45/bbl range. ..bruce..

RPeacock Author Profile Page:

The biggest problem with oil price prognostication is that nearly every so called expert is dependent on the industry for their income (or for their sources of information). This inevitably adds a wishful thinking plus-up to any prognosis. Personally I know too many speculators who were badly burned in the recent price bubble implosion to think things will be "normal" again for a long while. We will see prices average in the 40s for at least another 3-4 years before the market is again dominated by those who can only gain by the momentum of price rises.

yeolds Author Profile Page:

Having regard to the slow but certain depletion in production from some of the largest fields in the world [Suadi Arabia -9%, Mexico -7%, USA toast, Canada excl Tar Sands 8-10% etc] and having cognize of the cost of replacement by developing new sources [Canada Tar Sands, Colorado Shale, Brazil under Sea, etc] and being aware that OPEC uses more and more of her own production, it is necessary that the prices rise ASAP, else in two years' time there will be a catastrophic rise for lack of supply.

It is the nature of Capitalism that when things are going down, they cut investments necessary for the next year - Shell, Petro Can, etc in Canada's tar sands, Exon, etc all over the world. This is self-defeating quarter to quarter dividend watch at the expense of long term planning.

I forsee $75-85 price for oil in three months - presuming that the USA $ does not tank -- ELSE all bets are off.

Gl to the USA and the World re energy pricing in the near future.

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