PARIS (ResourceInvestor.com) -- As we enter 2008, there has rarely been a time when the prospects for the oil price could be so apparently volatile. Just take some of the figures we have at our disposal today as reminders.
One year ago the Nymex price for a barrel of crude fell just a shade under $50 intra day. By the end of the year it was hitting $99 per barrel, doubling in value inside 12 months.
Even more underwhelming for economic progress is the far end of the futures curve – then years hence - where crude has stubbornly resisted falling back too far under $90 per barrel. We have inventories that have fallen around the world as very expensive oil is forsaken for just expensive oil.
In the United States, the drop has been over 70 million barrels since the end of June, 32 million barrels less than this time last year, but despite the use of inventory oil there is no glut on the market. Despite the credit crunch, lay offs, write downs and belt tightening apace in the industrialised world demand is refusing to abate. At some point it has to slow down, but then we have been saying this for around four years and it has not happened yet.
China of course will still subsidise its hydrocarbon intake, meaning that it can afford to suck up bigger quantities of energy as it seeks to rapidly expand its economy. The same thing goes for India which also helps out its consumers. The United States has created a society in which addiction to oil and gas is obvious, even food production is not safe from the perils of gasoline production.
All of these factors are of course on the bullish side; they will prop up prices if they continue to be factors.
On the downside we are at last starting to see new capacity coming on stream after the boom in prices in the last four years. BP [NYSE:BP; LSE:BP] already has its 200,000 barrel per day Atlantis field on stream and moving to peak capacity and it intends to start up its even larger Thunderhorse field by the end of the year.
ExxonMobil [NYSE:XOM; LSE:EXX] is hitting up a series of fields in 2008 which will again add production and this has been reflected by the Energy Information Administration’s (EIA) prediction that outside OPEC we will see an additional 1.5 million barrels per day of output.
Then of course we have the pay off from the years of cheap credit that are now coming home to roost. Americans are continuing to lose their homes and starting to lose their jobs, even the oil companies, especially BP, are preparing to lay off people in the United States.
When people have jobs, even if their debt levels increase they can always re-finance their credit. When that circle stops, when they lose their jobs or when the banks reign in lending then the sphere is broken. It looks very likely, in the United States and the U.K., that this process is taking shape; we can only guess at how severe the outcome will be and how much that economic softness will dampen demand.
So once again like 2007 we are faced with a year where prices could go anywhere. One analyst said to this column he could see $50 oil or $175 oil in 2008, either of them could come true. There is also the wildcard of OPEC, where is their new floor price? $80? $70? What will their response be to economies that demand their products yet simultaneously try and replace them with biofuels and conservation?
Of course our regular readers will know that we predicted a price of $66.60 at Christmas, hey we were only $30 out. But it is hard to look too far beyond the other fundamentals, not of the oil market but that of the global economy. Will we see $50 oil before we see $150 oil? The answer is most likely: yes we will.
