This is an article from an Indian Newspaper: “Oil will fall below $100 a barrel” Predicting oil prices is a mug’s game. Yet I will stick my neck out and forecast that oil will fall from today’s $135/barrel to under $100/barrel by the end of 2008. Usually, when prices go up, demand falls. But world demand for oil has kept rising for five years even though the price of oil has quadrupled in this period. Why should the trend not continue? The short answer is that demand has indeed fallen in countries where consumers have borne the full brunt of higher prices. In the US, petrol has crossed $4/gallon, so consumption is falling. Demand for energy-guzzling vehicles has evaporated. Oil demand has stayed high in Asia, where demand has been rising fastest. Why? Because most Asian governments have rigid price controls on petroleum products. Although global prices have skyrocketed, domestic prices have risen very little, thanks to implicit government subsidies of trillions of dollars. These subsidies have spared the consumer pain. But in the absence of any pain, consumers have, very rationally, kept consuming. The International Energy Authority estimated in January 2008 that consumption in China, India and the Middle East would rise by 1.2 million barrels/day, even as it fell in rich OECD countries by 0.44 million b/day. This was partly because of faster growth of Asian nations, and partly because of price controls. The good news is that Asian governments have decided to bite the bullet. China, the fastest-growing consumer in the world, is raising the prices of petrol and diesel by 18% and of jet fuel by 25%. Oil producers are typically reluctant to raise domestic prices, but two of them - Malaysia and Indonesia - just have. Malaysia has increased prices by 41%, while Indonesia has raised the price of petrol by 33%, and of diesel and kerosene by 25%. Pakistan has announced that consumer prices will be raised rapidly from July onward so that subsidies for oil - which cost $2.4 billion last year - will be phased out completely by the end of 2008. Bangladesh’s oil subsidy is projected to hit an unsustainable $2.5 billion, so it is only a matter of time till the government raises prices. India has made petrol costlier by Rs 5/litre and diesel by Rs 3/litre. These are timid, insufficient increases. Yet they should encourage conservation in coming months. In sum, many big Asian consumers, who earlier kept demand booming through price controls, are finally changing course. That should cool demand in the second half of 2008. What about supply? Saudi Arabia has started pumping an additional 0.3 mb/day from its new Khursaniyah field, and this should rise to 0.5 mb/day next year. Brazil hopes to expand production by 0.54 mb/day in 2008. Azerbaijan, Russia, Kazakhstan and Canada will also increase production. These increases will largely be offset by declining production from several old fields - the North Sea, Alaska and Mexico. Even so, total global production should pick up in the second half of 2008, just as higher Asian consumer prices begin to slow consumption. Saudi Arabia has long argued that increasing Opec’s production is pointless because the additional production would be of sour, heavy crude oil, for which the world lacks refining capacity. Many old refineries are designed to refine light, low-sulphur crude, whose production has been declining fast. The good news here is that Reliance will soon be commissioning its new Jamnagar refinery which can process 28 million tonnes/year of the heaviest, sourest crudes. Refiners in other countries have also been increasing their ability to process low-grade crudes. Production at some new fields — like Saudi Arabia’s Khursaniyah — will be of light oil. This improving match between production and refining capacity should help cool prices. Hopefully, Reliance Industries will also start producing gas from its giant Krishna-Godavari field in the second half of 2008, though the dispute with Anil Ambani may cause delays. This gas will substitute oil in fertilizer and power production, and increased gas-based electricity should reduce the use of diesel gensets. Finally, ethanol production is rising. US production of corn-based ethanol is projected to rise from 0.42 mb/day in 2007 to 0.58 mb/day this year and 0.64 mb/day in 2009. Brazil’s production is expected to cross 0.35 mb/day. So, ethanol production is heading for a million barrels/day, reducing petrol demand correspondingly. Corn-based ethanol has been criticized for raising food prices, but it also dampens petrol prices. For these reasons, i predict a modest rise in the production of and modest cooling of the demand for oil in the second half of 2008. That should suffice to bring the price down to $100/barrel. That is not exactly low. And it may go up again if the world economy grows strongly in 2009. But let us be thankful for any decline, even a temporary one. My prediction could be wrong for several reasons - a US/Israeli attack on Iran, terrorist attacks on US oil installations, hurricanes in the Gulf of Mexico that destroy oil platforms. But let me not take refuge in ifs and buts. Let me stick my neck out and shout, “Oil at $100/barrel.”
Good post. I suppose it depends on how quickly OPEC can increase supply. Demand is ever increasing, and for OPEC supply to be sufficient it might takes 1-2 years to bring the price back below $100.
How many more thousands of barrels a day do they need to pump to lower to the price according econ101. Price isn’t always supply/demand…especially when theres derivative markets and hedge funds at play. I’m going to see when oil reaches a high enough price that there starts to be a net short postion on oil futures.
A net short position in oil futures? They just don’t work that way.
sounds like a swag - but just as good as a Goldman swag i suppose. i love how these indian papers write “oil to fall to $100 soon” as the title for such an article. the quality of indian press writing is little better than the zimbabwean press frankly. there are exceptions like the new HT paper “Mint” but ecotimes, hindtimes, toi etc are toiletpaper.
I read an article somewhere where it mentioned that supply is still very much higher than demand, and the real question is how high will demand for oil reach in India/China in the next few years. Speculators, on the back of a falling dollar, have jumped ship to oil futures and are making assumptions about future demand in those two countries. These assumptions could be way off and result in oil prices < 100. Sounds reasonable to me, especially since demand did not really quadruple in a 2 year period.
now after the opec meeting … i think the indian dude should be feeling like dumb stupid … why do these ppl … forget the USD is falling and OPEC wants to get paid what it supply … its been a while gennie is out of the bottle … and its getting bigger … hard to put it back, well may be a taboo on WS but I personally think “Peak Oil Theory” has some merits. Brazil could be a balancing factor as Saudia had been in past, hope that the “Carioca” field discovery is for real but it will only add to supply gradually… and also hope there will be more fields like Tupi and Carioca… also Iraqi fields can increase supply at the moment … Depth of avg oil well, discovery and extraction costs, other cost inflation, and the quality of crude are playing a major role in oil prices
I am pretty clueless about oil so hopefully someone can answer this for me: Why has the price of gasoline risen so much, while at the same time, oil companies have record profits? I always envisioned gas as sort of a spread business where companies just slapped on a spread to every gallon produced so that their profits ebbed and flowed with demand. Obviously, that is not the case. While gas has risen significantly over the past several years, I can’t imagine demand has increased by the same amount And it seems profits for Big Oil have increased even more so. Is it because there is increasing concern about the amount of oil left to be drilled? Price fixing? OPEC taking as much profit as they can while they can? Increases in consumption outside the US? All of the above?
hezagenius Wrote: ------------------------------------------------------- > I am pretty clueless about oil so hopefully > someone can answer this for me: > > Why has the price of gasoline risen so much, while > at the same time, oil companies have record > profits? I always envisioned gas as sort of a > spread business where companies just slapped on a > spread to every gallon produced so that their > profits ebbed and flowed with demand. Obviously, > that is not the case. While gas has risen > significantly over the past several years, I can’t > imagine demand has increased by the same amount > And it seems profits for Big Oil have increased > even more so. Is it because there is increasing > concern about the amount of oil left to be > drilled? Price fixing? OPEC taking as much > profit as they can while they can? Increases in > consumption outside the US? All of the above? The price of gas actually hasn’t kept up with the increase in oil prices. The companies reporting record profits are the integrated oil & gas co’s. These guys are doing well because in the short run, their cost to pull oil out of the ground is relatively fixed, so they reap the benefit of higher prices. Refiners - people who buy oil, crack it, and turn it into gasoline and other finished products, are actually hurting big time. If anyone would like to pontificate more about the crack spread I’d be very interested, and not just because I giggle when I think “crack spread”.
I agree with that article to an extent. Although, I’m more in the “weak dollar” camp with respect to the rise in oil prices over the past year. I readily acknowledge that demand is most definitely increasing and there are definitely risks to supply. I just don’t buy that no one knew about this or was able to quantify it until last fall. Oil has skyrocketed since the start of the rate cutting cycle in the fall of last year. If you invert the value of the dollar against the price of oil since the cutting cycle began, it’s scary how close they follow each other. It may just be coincidence but I don’t think that’s the case. Oil will come down as soon as the Fed is forced to tighten as opposed to simply jawbone about a strong dollar. Despite, the high oil prices, they’re loving the weak dollar’s effect on GDP from lower export prices. Headline inflation has been skyrocketing but core hasn’t increased nearly as much. But eventually, high oil prices will creep into the core and it too, will start moving more aggressively to the upside. It’s starting to happen…and now we’re hearing about surcharges for bags on airlines, increased costs to overnight a package, etc. Once core inflation starts moving up the Fed will be forced to act…increased rates should boost the dollar which would in turn reduce oil prices. Part of it will be relative to what the ECB does but their economy is in pretty bad shape itself so raising rates aggressively would be difficult to do there. And besides, they’ll welcome a stronger dollar. Anyway, if the dollar strengthens somewhat modestly, even 10%, speculators would then begin to move out of oil and into the next trade pushing oil prices lower. We’ll see I guess…but I just don’t buy that no one was able to remotely quantify increasing demand from China, India, and other emerging markets until late last year.