Crude oil to spike higher over the next 12 months

UNTIL the start of this month crude oil had been trading in a tight range between $75 and $80. But those commodity analysts who argued that the price of a barrel of oil did not justify its supply and demand fundamentals will be feeling rather smug right now. Since the start of December, crude oil has lost 13 per cent of its price, dropping to as low as $68.59 during intra-day trading yesterday.
In fact crude has lost more than 11 per cent in the past nine sessions – its longest losing streak since June 2001 – as weak demand put downward pressure on the price.

Slowing demand from developed countries has been of particular concern – yesterday the world’s third largest oil consumer, Japan, saw its business confidence survey post its smallest improvement this year.

This move below the psychologically important $70 a barrel level consolidated oil’s break lower from the original trading range and raises questions for traders about whether crude will continue to fall ahead of the holiday season or if the price will be supported by investors entering positions at lower prices and an improving overall economic outlook.

Bank of America-Merrill Lynch commodity strategists certainly fall into the latter camp. Although not necessarily bullish over the next three months, they expect that an improving US and global economic outlook will start to create cyclical demand pressures on commodity markets.

They forecast an average West Texas Intermediate (WTI) crude oil price of $85 a barrel in 2010 and even believe that oil prices could spike above $100 a barrel as we head into 2011 on a combination of loose monetary policy and dollar depreciation on a trade-weighted basis – they estimate that the sharp depreciation of the greenback has contributed to about one-third of the rise in global crude oil prices.

However, while it has been difficult to justify higher oil prices in 2009 using fundamentals, BoA-ML strategists say that a tightening in physical oil supply and demand fundamentals could play a significant role in propping prices up next year. “While inventories of crude oil and petroleum products are still bloated, we expect them to fall in 2010,” they say.

And on the demand side, they now see global oil demand growth at 2m barrels per day, of which 1.5m will come from non-OECD markets, where growth is very oil-intensive.

BoA-ML is not the only investment bank to be bullish on oil at the moment either. Goldman Sachs expects WTI crude to hit $92.50 a barrel by the end of next year and $110 by the end of 2011, also based on strong demand from emerging markets.

Contracts for difference (CFDs) traders should be making the most of the sub-$70 a barrel prices before they disappear in the early spring.

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Citigroup’s announcement that it would start to repay the money it owes the US government boosted the stock yesterday.

The troubled US bank revealed that it would issue $17bn of stock in order to raise money to exit the Troubled Asset Relief Programme (Tarp).

The bank suffered badly during the financial crisis and its stock plunged as low as $1.02 at the beginning of March before recovering along with the wider market. But the stock has been stuck in a trading range since the middle of August as the general stock market recovery has slowed in recent months.