Thursday, February 5, 2009

Outlook for Oil Prices

Readers Question: Any ideas about oil prices for this year? A fall to well below $40 or is it cheap as is? OPEC says that $60-$80 is required for investment in new production facilities and discovery projects.

Oil has proved a volatile commodity. When it was racing towards $150 a barrel in the summer of 2008, few were predicting a collapse to $40 a couple of months later.

Although, the world economy may experience the first period of negative growth since the second world war, in the medium term you would expect demand for oil to continue to rise. As demand rises this should push prices back up.

For some areas of oil production like Siberia and Alaska the cost of producing oil is said to be close to $60-80 so if oil falls below this, they may shut off production at least temporarily. This restriction of supply would also help push prices of oil back up.

One interesting feature of the oil price rise in early 2008 was whether the price rise was due to speculation or 'peak oil theories' - the idea we were close to running out. The fact the price collapsed suggests it was mainly due to speculative demand. Therefore as the economy recovers we may see a more moderate rise in oil prices.

However, as I mentioned in good investments for 2009, I would be very surprised not to see oil prices rising either in the near future or at least by next year.

A prediction I made about oil prices 12 months ago

No comments: