Tokyo, Japan (PressExposure) March 10, 2011 -- After starting the year at slightly more than $80 a barrel, oil prices this week, rose to their highest level in two years, with West Texas Intermediate (WTI) crude surging as high as $90.76 a barrel. But that 13% advance is just the beginning. Crude oil prices are poised to again break the psychologically important $100 a barrel mark in a bid to move higher throughout 2011 and 2012, and some forecasters are calling for prices to zoom by as much as 65% from here.
Kaimon Global analysts believe we will reach triple digits early next year and could reach $150 by mid-summer. Dollar weakness is a factor, as is raising demand from non-OECD [Organization for Economic Cooperation and Development] countries. Other factors include supply concerns, quality of crude extracted, reserve replenishment, level of stockpiles and the occasional saber rattling.But even if crude prices don't reach that admittedly lofty level, there is a strong consensus about the market for "black gold" in the New Year. There may be zigzags in the future according to the economy, this and that, but the general trend is we will see higher oil prices.
The sluggish pace of economic growth has kept oil in check, even as other commodities have surged ahead. Global supplies have been ample and production from the Organization of Petroleum Exporting Countries (OPEC) has been strong. But going forward, the same factors that drove oil prices to a record high $147.48 a barrel in 2008 will again conspire to push oil prices higher in 2011. No doubt, the rising demand for oil from emerging markets will be one of the main catalysts pushing oil prices higher.Oil demand in the third quarter of 2010 was up 3.7%, marking the fourth straight quarter of growth - a trend that is likely to continue through 2011 and beyond.
The underlying economic picture is still positive. We are still looking for economic growth because of quantitative easing and accelerating growth in emerging markets.
Global oil consumption has rebounded from the lows in early 2009 and now exceeds pre-crisis levels. However, consumption in developed economies remains 8% below 2007 levels, which means emerging markets have picked up the slack.
Indeed, the usage gap between developed markets and their "emerging" counterparts has shrunk from 12 million bpd three years ago to just 4 million bpd today. It comes as no surprise that the geographic distribution of oil demand growth follows that of economic growth: Emerging markets, rather than the OECD, drive the increase in global oil demand in 2010 and 2011.
The most dynamic emerging market growth has come from China, whose economy is expected to expand by 9.1% in 2010. Oil demand in China is expected to grow 10.4% this year - the fastest rate of any country in the world. The country's growing need to import fossil fuels to meet its rising domestic demand will have an increasingly large impact on international markets.
Furthermore, when Japan hit $5,000 of gross domestic product (GDP) per capita, oil demand grew at a 15% annual rate for the next 10 years. The same is true off South Korea. However, China reached the $5,000 GDP per capita mark in 2007, and oil demand has only grown at a 7% compounded annual growth rate.
Oil demand is also growing briskly in other economic hot spots around the globe.
India consumed nearly 3 million bpd in 2009, making it the fourth-largest consumer of oil in the world. India has the second-largest proven oil reserve in Asia - behind China - but it is expected that the subcontinent to become the world's fourth-largest net importer of oil by 2025, behind the United States, China, and Japan.
A Speculative Surge
Finally, the key oil-price catalysts transcend the simple "Econ 101" arithmetic relating to supply and demand. Other factors are at play, including investor sentiment and the value of the U.S. dollar.
Because oil is priced in dollars, it is vulnerable to changes in the dollars value relative to other currencies. A stronger dollar makes oil more expensive for foreign countries that have to convert their domestic currencies into dollars to buy crude. Conversely, a weaker dollar makes it cheaper for countries that import oil.
When oil reached its record high in 2008, it was largely because speculators had piled into crude - and a host of other commodities - to hedge against the beleaguered greenback. Similar behavior could exacerbate oil's 2011 ascent.
As for speculation, it is the nature of the beast; Oil is both a commodity and a financial asset in its own right. That means its trading impact is much broader than the oil for delivery alone.
The bottom line: Both the short and long-term outlooks for oil prices are bullish.