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What a year, what a year. After a dismal second half of 2008, which saw the price of oil cut by more than two thirds, crude jumped back on the bull in 2009 with a barrel closing the year at $79.36, up 78% from $44.60 one year ago. The rise was due in large part to the liberal supply cuts by OPEC which promised to take 4.2 million barrels per day off the market. And while compliance has always been an issue with OPEC, the cartel was able to deliver about 80 percent of those cuts in 2009, constricting saturated world oil markets and lowering inventories. But with an impressive 2009 over, the question is: What can we expect for 2010? Will oil continue its upward trend, reverse and head lower, or hold steady? The way I see it, a downward movement is very unlikely. In order for the price of oil to plummet, the market conditions would have to be similar to what they were in 2008, i.e. when the U.S. dollar rally was at its peak... when demand destruction in the U.S. and other heavy consuming nations was extreme...and when the growth outlook from emerging heavyweights China and India was unclear. But times have changed. The US dollar has weakened significantly in the past 12 months, down 21% and 13% against currencies such as the Australian and Canadian dollars respectively. Since oil is denominated in US dollars, US dollar depreciation results in a nominal price increase. As well, with coordinated government stimulus plans kicking into high gear, world demand is heating up. According to the EIA, world oil consumption will grow in 2010 by 1.1 million barrels per day to 85.2 mbd. This surge will be led by non-OPEC countries like the developing nations of China and India where strong numbers have shown the economic recovery is setting in much faster there compared to western nations. So how will this affect the price of oil in the coming year? According to the EIA: “Prices continue to rise gradually… as the world economy rebounds and global demand grows more rapidly than liquids supplies from producers outside of (OPEC)… EIA forecasts that WTI spot prices will weaken over the next few months, falling to about $75 per barrel in February, and then rising to about $82 per barrel by the end of next year.” That’s a very conservative prediction to say the least. While I agree with the EIA forecast that the price of oil will rise, I am much more bullish. In fact, I expect oil to hit $100 a barrel this year. Continued weakness in the US dollar... Economic strength in developing nations like China and India... Western nations emerging from recession... These are all reasons I believe oil is headed back above the century mark. So if you’re a junior oil bug like me, now is a great time to be bargain hunting. As oil prices rise, so will the attention these little guys get. And you want to get in before that happens. Yours in profits,
Roger Gaines |
