Crude Could Fly High Again

Have you been wrapped up in the government's attempts to confront the financial panic? Well, you might also want to keep tabs on the oil-price forecasts that are beginning to drift in for 2009. Something tells me that the latter will be a bigger determinant of economic vitality next year -- and for eons to come.

As The Wall Street Journal pointed out over the weekend, most of the prognostications for the coming year are more bullish than you might have expected. Perhaps the biggest surprise among the forecasts comes from the Energy Information Administration, an arm of the U.S. Department of Energy. I've noticed that the administration typically comes in low on its forecasts, yet it's now looking for a $126.50-per-barrel average for 2009. That figure compares with projected averages of $107 and $120 from Merrill Lynch and Deutsche Bank, respectively.

And Arjun Murti of Goldman Sachs, who in May saw an "increasing likelihood" that we'd hit crude levels of $150 to $200 in the next six to 24 months, is now looking for a $110 average next year. That's down from his earlier $140 expectation.

Although higher prices are fine for the likes of ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) -- at least from a financial standpoint, if not from a political one -- they probably won't do much for refiners such as Tesoro (NYSE: TSO  ) and Valero (NYSE: VLO  ) , which suffer when crude prices outstrip their gasoline counterparts. Those higher prices will, however, also grease the skids of such oilfield-services companies as Schlumberger (NYSE: SLB  ) and Transocean (NYSE: RIG  ) .

I have two reactions to the predictions. The first is that they're generally not worth the paper they're printed on. Who can envision, for instance, whether difficulties with Iran will expand into a military event that could affect the Strait of Hormuz, through which much of the world's traded crude passes? Were that to occur, you can apply a major multiplier to the highest of the forecasts.

Secondly, it's somewhat sobering to note that as recently as 2004 -- the last year in which we held a national election, I might add -- West Texas Intermediate crude averaged $41.44 a barrel. On that basis, and by looking at next year's forecasts, we can easily agree on one thing: It'd be a surprise if crude headed appreciably lower.

With all of this in mind, I'd recommend that Fools remain diligent about re-oiling their investment portfolios on a regular basis. 

For related Foolishness:

For three energy stocks that Motley Fool analysts believe will profit from "The Next American Oil Boom," check out our brand-new free report. You'll get three stock ideas from top analysts, plus some straight talk on our oil "crisis." Access is free!

Fool contributor David Lee Smith doesn't own shares in any of the companies named above. He does, however, welcome your questions or comments. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 23, 2008, at 11:21 AM, Brettze wrote:

    David Lee Smith

    Maybe you are too young to remember that oil prices fell to $10 a barrel from $40 during Iran's Khomeini revolution of 1979. During the period of 1975 to 1980 or so, the Big 3 cut hundreds of pounds off their big car lineup and chopped a foot length off the rear and front ends. The engine displacements was reduced in all V8 engines. Also, there were so many four cylinder engine models introduced. the CAFE fleet soared from 13 mpg to over 20 mpg . Congress enacted 27.5 mpg and such and such. This will be a same repeat of that in the coming years but much better. Why? more cars will shut down while idling at intersections as more hybrids and electric cars will be introduced. This will place a real major dent on the demand of oil supplies. We will probably never see $10 a barrel and we will probably never be able to avoid another uprising in the Middle East. But the oil prices is heading lower or even much lower than you think or project. The recent fall in oil prices was dishonest by short selling so abruptly right after speculating oil prices higher to $145 in hopes to pacify Americans into wasteful driving habits. The oil prices reared its ugly heads as it suddenly jumped back to $130. It was thought that we are using less oil due to economic hardships which was false. We are too addicted to oil that GM and Ford has no choice but to shut down SUV and PickUp plants to stem off our stubborn addiction to oil. This is why we need socialism to control ourselves from our sensless consumption of oil as one instance of so many!

  • Report this Comment On September 23, 2008, at 1:16 PM, bojangles31 wrote:

    As highlighted in the comment, demand is a significant determinant in the price - short and long term - of oil. I'd suggest that there are two critical issues not highlighted above that we all should consider. The first is that a middle class larger than our entire population is developing in China and India. They will want not only cars, but also the other fossil fuel driven comforts of modern life. Thirty or forty years ago, we were the primary driver of demand. In the next thirty or forty years, we will not be. This demand will drive oil and other commodities, like coal and copper, higher over time.

    The other is that supply has peaked based on our current models and at current prices. The decline curves of our current production is greater than the new announced finds not yet developed. We will discover other sources that may delay the decline curves of known and announced production, but it comes at incremental cost.

    Oil prices go up and down daily, but the discovery and development of oil takes years. Oilfield service companies are the recipiant. The more technologically advanced, the longer the current backlog. However, most well run service companies will participate.

    Unless you are trying to time short term oil prices, nivest in the oilfield services industry. While conservation is appropriate. The service companies will be long term winners in our economy regardless of the size cars Americans drive.

  • Report this Comment On September 24, 2008, at 12:04 PM, ProsperoScot wrote:

    According to the US EIA (Energy Information Administration), US petroleum consumption currently runs around 20.7 million barrels per day: of which, 9.3 million barrels (390million gallons) is consumed in transportation or about 70%.

    Although the rise of the BRIC significantly adds to current and future demand for oil in global transportation, surely the future price and trend for oil prices will be determined by how quickly environmentally friendly and economically feasible substitute energy sources are found for petroleum oil in our road transport? Aviation may be a tougher call. Shipping (one of the greatest CO2 polluters) could return to the sail and combine with solar power.

    Until such utopian days arrive, the demand for oil is likely to outstrip supply (assuming we have reached Peak Oil) in the longer term. So $100 a barrel may be as much a memory as $1.80 in 1972, prior to its quadrupling after the OPEC oil crisis when it reached $12. Ah, those were the days!

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