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Outlook for Crude Oil in 2010

2 January 2010

The drop off in the oil price in the latter part of 2008 from the highs at $147 gave the market food for thought with respect to the oil price and its perception as a “one way bet”.

The lows of $32.70 earlier this year had a number of analysts targeting the $20 area, but in reality that was never a realistic bet.

The recovery since then has been stimulated by a number of factors, including OPEC production cuts. Low global interest rates have also come into play as well as stimulus programs where the US dollar became the carry trade of choice as investors dumped dollars against everything and bought a range of commodities across the board.

Having hit peaks of $82 in October the oil price has been struggling somewhat and has been in a declining trend since then.

Any economic recovery will certainly underpin the oil price but with a significant supply overhang any extended upside, could well be fairly limited. It is unlikely that we will see the 2008 highs of $147 next year.

An oil price above $100 would be a threat to any future economic recovery as costs for business will rise and eat into margins; and choke off economic recovery; therefore prices should average around the $70 mark.

The EIA projects that global oil demand will rebound, but only slightly in 2010, with stronger demand from nations not in the OECD, for example, in Latin America and other developing nations like China and India.

This year has seen some significant new finds in places on the South American continent and Africa but it is noticeable that some of these finds have been at depths of 35,000 feet which makes it quite expensive to drill.

For these sorts of explorations to be commercially viable then the oil price needs to sit at quite a high level.

The OPEC quotas are one way to do that and the decision to hold current quotas steady should underpin the oil price within OPEC’s target range of $75 a barrel and probably not see it too much below $65.

However, if the global economy starts to slide back into recession then oil prices could start to slip back as demand drops off.

That obviously pre-supposes no conflict in the Middle East, and certainly any unrest between Iran and Iraq, as seen by last week’s sabre-rattling by Iran, or Israel attacking Iran’s nuclear sites could send oil through the roof.

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