Forecast for Crude Oil

Will Global Demand Increase As U.S. and Chinese Growth Rebound?

Government stimulus programs look to continue to impact global growth over the next six months. This should remain a supporting factor for crude prices. The 3.5% surge in third quarter U.S. GDP was primarily driven by the “cash for clunkers” and new home buyer tax credit programs. The latter has now been extended to April 2010. We saw similar results in Germany with their car rebate initiative as Europe’s largest economy emerged from its recession in the second quarter. However, concerns are that, as government aid dissipates, a lack of consumer demand will put the recovery in jeopardy. This turns the focus towards China, which is expected to be the key to a global recovery. The health of the Chinese economy may be the main driver of future oil prices. The Asian giant saw third quarter GDP rise 8.9% as government programs fueled household spending. This added 4% to total growth, offsetting weakness from falling exports. If demand for Chinese goods starts to approach 2007 levels, when it contributed 2.6% to GDP, then the world’s third largest economy may become the engine that drives broader growth. Yet there are concerns that record bank lending could lead to a credit or property bubble and that rising inflation may force the government to start tightening. OPEC raised its forecast for world oil demand by 200,000 barrels a day for the remainder of 2009 and 2010. Demand above these levels could deplete existing stockpiles, forcing oil prices higher.

Will OPEC Increase Supply?

One of the reasons that we may not see oil prices appreciate much further is that increased production from OPEC and other oil producers looms. OPEC president Jose Botelho de Vasconcelos, recently stated that the group would most likely raise output at its next meeting on December 22 in order to protect the global economic recovery should the price hit $100/bbl. Additionally, Qatar's Oil Minister, Abdullah al-Attiyah, stated, “If we see real shortage in the world, we will increase production to meet the shortage." However, that isn’t likely unless we see the global economy continue to grow. The latest EIA report showed that current crude inventory level in the U.S. is 28 million barrels higher than a year ago, which was the last time we saw prices at current levels. Therefore, the fundamentals of supply and demand may be decoupling from valuations. This could lead to a correction in the near-term. Yet, inventory levels remain below the five year average for this time of year and a spike in demand could justify higher prices.

The U.S. Dollar Is The X-Factor.

Since most commodities are priced in dollars, they become more attractive to investors outside the U.S. when the dollar is weak and more expensive when the dollar is strong. Recent greenback depreciation helped break oil prices from their previous range and threatened to drive them higher. The quantitative easing measures by the Fed are expected to continue having a negative impact on the dollar, which could continue to contribute to higher crude valuations. However, policy makers are already prepping markets for their exit strategy, and the Federal Open Market Committee is expected to raise rates at some point next year. Therefore, if U.S. interest rate expectations start to rise, a dollar reversal could follow.
 
Oil May Become Range Bound As Growth Story Unfolds.

The credit crisis is anticipated to have long-term negative effects on the global economy which could limit optimism going forward. If we see a pullback in demand for risky assets then we may look back and see that $82/bbl was the peak of the current uptrend. We could see prices fall back toward the recent range of $65–$75/bbl in which crude traded within throughout August and September. However, dollar weakness and a global recovery are expected to continue over the short term, which could send crude to test $100 per barrel.  Reaching beyond this psychological level could be prohibitive with the threat of increased production and its implications on growth.

Will Crude Oil Maintain It’s Rally?
 

Following the triple bottom in 2008, crude oil has pushed higher throughout the first half of 2009 and crossed back  above the 61.8% Fib (103.26) retracement in September, and could work its way towards the 38.2% Fib at 103.26 over the next six-months if it continues to hold the upward trending channel going forward. Recent price action looks as though oil is building a base around the 61.8% Fib and prices may continue to push higher going into the following year as the rally remains well supported by the 100-Day SMA at 70.24. However, if oil fails to find near-term support around $76.25/bbl, prices could fall back towards the 23.6% Fib at $59.37 to retest the June lows for support and may hold a range of $60–76/bbl as the rally tapers off.

 
A seasonality plot of crude oil during the last ten years shows that prices have typically held below $80/bbl during the first-half of the year and have typically found a bottom from December through February. As a result, we may see prices fall back from the recent highs and hold the historical range of $25–$80 over the next six months as prices seem to be finding resistance at the $80/bbl level. However, this year’s rally looks to be moving in tandem with the trend last seen in 2006, and prices could be poised to reach $100 a barrel in the next six months if oil maintains the rebound from the beginning of this year.