Oil forecast -- Prices above $60 per barrel through 2007

November 15, 2006

On November 10th, the International Energy Administration (IEA) lowered their monthly forecast for worldwide demand for oil for 2006 from 84.6 million barrels per day (bpd) to 84.5 mbd, but kept their forecast for 2007 at 86 million bpd.

At the same time, the IEA reported that world oil supply increased in October to 85.3 million bpd, creating an oversupply of 1.3 million bpd. This oversupply is expected to continue through 2007 unless OPEC makes good on their agreement to decrease supply by 1 million bpd.

What It Means:
Oil and gas prices are expected remain at a current levels through next year. Demand in the U.S. has been modified downward thanks to forecasts for slower GDP growth. However, growth and demand for oil is expected to remain strong in China and other developing countries.

With increasing supply comes the risk that OPEC countries will followthrough on their decision (made at the the September 11 meeting) to cut production by 1 million bpd. Based on their actions and statements in the press, it appears their goal is to keep oil prices between a range of $60-70 per barrel --high enough to sustain revenues, but low enough to discourage development of alternate fuel sources.

The U.S. Energy Information Administration (EIA) forecast oil prices to average $65 per barrel for West Texas Intermediate crude in 2007, based on the IEA demand forecasts. The agency also notes a decline in U.S. petroleum inventories of 27 million barrels.

In July, many experts were forecasting that oil could go as high as $100-$150 per barrel. Since then, the situation with Iran has stabilized somewhat, and the U.S. economy has slowed significantly. Current forecasts could adjust if the underlying assumptions change. However, a return to 2005’s $41 per barrel prices are unlikely to happen, thanks to robust growth from emerging markets and stable demand from the U.S.

Action Steps:
Make sure your portfolio contains some good natural resources funds, including not only oil companies, but also transportation and refineries. Ask your financial planner for some recommendations.

Source: International Energy Administration Monthly Outlook Highlights, Energy Information Administration, U.S. Energy Prices Base Case, Short Term Energy Outlook, November 2006.