The Search for Tomorrow’s Oil Price

Michael Giberson

Just a few months ago, oil prices were scrambling upwards and the sky was no limit. From the New York Times in May:

Arjun N. Murti … foresees a “super spike” — a price surge that will soon drive crude oil to $200 a barrel.

An analyst at Goldman Sachs, Mr. Murti has become the talk of the oil market by issuing one sensational forecast after another. A few years ago, rivals scoffed when he predicted oil would breach $100 a barrel. Few are laughing now. Oil shattered yet another record on Tuesday, touching $129.60 on the New York Mercantile Exchange. Gas at $4 a gallon is arriving just in time for those long summer drives.

Mr. Murti, 39, argues that the world’s seemingly unquenchable thirst for oil means prices will keep rising from here and stay above $100 into 2011.

Later in the same article, “Boone Pickens, the oilman turned corporate raider, said Tuesday that crude would hit $150 this year.” Close, but not quite, as oil peaked at about $147/bbl on NYMEX in early July. Even in May, not everyone thought “up” was the only button on the oil market price control program:

But many analysts are no longer so sure where oil is going, at least in the short term. Some say prices will fall as low as $70 a barrel by year-end, according to Thomson Financial.

Perhaps “many analysts” will soon become as known as Mr. Murti.

An Associated Press story at notes now, “On Monday, Goldman Sachs, among those predicting $200 a barrel oil, cut its year-end forecast of oil to $70 from $115 and lowered its price outlook for the end of 2009 [to] $107 per barrel from $125 to reflect weak global economy.”

So is $70 the new number for oil, for now? The WSJ‘s Environmental Capital has run several recent reports on recent oil price drops and the speculation about where they might be next.

In “Crude Counting: How Much Should Crude Oil Really Cost?“, Keith Johnson explores where the floor might be: the historic floor around $35 (in today’s dollars), the $80 marginal cost of producing some of the current high cost crudes, the $55 – $95 price estimated to be needed by some OPEC nations to balance their budgets.

In May I noted work by David Vatter on “OPEC’s Demand Curve”, which implied that OPEC would maximize oil income between $80 and $100. I concluded that, “If real prices fall below $80 in the next few years and stay below $80 for a while, that will be reason to believe that oil prices now were too high even for OPEC.”

Obviously that wasn’t a forecast on my part – I’m not in the forecasting business. (But I am thinking about buying an SUV.)