Oil will likely crest the $100 (U.S.) mark again in the next 12 months, breaking through a major price barrier as economic recovery around the world brings soaring demand and shrinking stockpiles.
In the past week, more than a half-dozen financial institutions have boosted their crude price projections. Though most continue to believe oil will remain in the $80 range for now, many forecast triple-digit spikes in 2011 - and the most bullish say crude could average $100 for the year.
In Canada, the optimism comes as companies stage a multibillion-dollar return to the oil sands, which is predicated in great measure on confidence that crude prices will remain strong. Although the industry tends to use more conservative long-term projections - many peg oil around the $75 mark - rising crude prices have, in the past, served as an encouragement to speed development of Alberta's massive bitumen resource.
With oil flirting with 25-month highs, analysts say the future could be bright for those producers. As it looks to the year ahead, ING now believes oil will hit $80 to $100; Deutsche Bank, $87.50; JPMorgan Chase, $93; CIBC World Markets, $86; Société Générale, about $93.
But both Goldman Sachs and Morgan Stanley foresee a $100 crude average price in 2011. Goldman believes 2012 will be even better, at $110, while Morgan Stanley is slightly more pessimistic, forecasting $105 in two years.
In a report published this week, Morgan Stanley research analyst Hussein Allidina cited the 3.6-per-cent rise in global demand for crude over the past year, as well as a recent drop in oil inventories, as factors in the firm's prediction of a 2011 crude price of $100.
"Improving global demand, now at an all-time high … has been largely responsible for tightening inventories, and we expect further declines through the winter as demand improves seasonally," he wrote.
Together, those factors are likely to force the Organization of Petroleum Exporting Countries to boost output, which will in turn reduce its current six million barrels a day of slack capacity to about four million by the end of 2011, Mr. Allidina wrote. The world now consumes 88.5 million barrels a day, and oil prices are often pressed upward when slack capacity decreases.
He noted that it isn't only China, with its 12.7-per-cent, year-over-year growth, that is driving the way forward. Even the United States is showing a slight rise in crude use, and, "though lagging, OECD demand has recovered, having posted seven consecutive months of year over year growth (a feat last achieved in March, 2005)," he wrote.
What remains unclear, however, is how strongly OPEC will respond. Member countries have said they are happy with crude in its current range, and may act to depress prices in hopes of avoiding the collapse that followed the last oil run, in 2008.
"That's always the tightrope OPEC has to walk. They don't want to risk biting the hand that feeds," said Katherine Spector, commodities strategist with CIBC, who on Monday predicted oil will nonetheless rise to $100 in 2012. It's no longer clear what oil price is unsustainable, she said.
"A few years ago, $40 was a pretty scary number in terms of what it meant for the economy," Ms. Spector said. "We're in a rather different universe now."
Still, triple-digit oil prices may also be enough to favour the economics of alternative energy sources, which could in turn help lower demand.
Global shocks could also wreak havoc with pricing. "If there's a confrontation between Israel and Iran tomorrow, you have $100 oil in a heartbeat," said Adam Sieminski, energy strategist with Deutsche Bank. A double-dip recession could have the converse effect - as could any revelation that undermines China's robust growth in demand.
If, for example, China has been buying crude simply to build up reserves, its crude demand could be artificially high. If that were true, it "would make a big difference to people's perceptions of what's going on," he said.