Crude Oil Forecast for 2010

At decade end the price of crude oil was just below $80 a barrel at $79.62. Even the prospect of a weak economic recovery for the United States has been reasonably supportive of prices.

The BRIC nations of Brazil, Russia, India, and China continue to have economic expansion that is in the five to nine percent annual growth range. With about one third of the world’s population living in those four nations the demand for crude oil and related products remains high as numerous additional millions of their citizens can afford cars, higher quality housing, the latest TV’s, air conditioning, more meat in their food selection, and all of the other things that citizens of more developed nations crave that require higher energy inputs. In 2010 oil demand from the BRIC group will continue to grow rapidly unless the planet experiences a really horrendous economic whack and descends into a massive depression.

A mild recovery in the US and Europe and continued high growth in the BRIC nations will keep upward pressure on oil product demand and therefore on crude oil prices in 2010. One other fairly new development that mustn’t be overlooked is that a higher rate of domestic oil consumption in Mid Eastern nations will cut into the oil that is available for export. Despite the Dubai bust the region by and large is in a period of fast economic growth.

When one looks at the supply side of the equation you can see that the oil market is only one unexpected event away from a massive oil price spike. With major oil fields world wide in a state of decline, like the Mexican Canterell field, an event like an raid by Israel on Iran could send oil prices one hundred dollars a barrel higher within one day. With supply conditions tight even minor disruptions in supply, such as a hurricane in the Gulf of Mexico, may well spike oil prices acutely higher.

In short the bias for crude oil prices in 2010 is to the upside. Even given a year free of major supply disruptions I do anticipate that oil prices will close out 2010 well above $100 a barrel. There is the economic “choke” factor that may keep a lid on oil prices unless a major geo-political event occurs. As oil prices move above $85 a barrel airlines began to fall out of the sky, trucking companies begin to go belly up in droves, and in general the economy begins to be torn apart as growth is choked off. This would impact demand, certainly in the US, and perhaps oil prices would once again fall as demand is severely reduced.

So while the crude oil price bias will be to the upside the price action is likely to be exceptionally volatile as the forces of supply and demand play out on the world stage. However, with current supply and demand so closely in balance and the prospect of major bothersome events so high in 2010, think Iran, a bet on higher crude oil prices, perhaps much higher, is in my opinion entirely justified.

As the world economy transitions due to to the constraints that peak oil places upon it look for oil market price volatility to continue for all of 2010 and well beyond.