Oil price predicted to be low this year
February 2nd 2010

Despite the world’s long term march toward peak oil – the time when daily oil supply to the world can no longer be expanded – oil may see more downside than upside in this year comments Saxo Bank. Even a dramatic geopolitical disruption related to Iran’s nuclear ambitions may do little to upset the well-supplied energy markets. After the spectacular collapse in oil in late 2008 on the heels of the credit meltdown and worldwide recession, oil went on to rally more than 100% off its lows around $35 dollar per barrel in early 2009 to as high as $82 dollars by later in the year. Prices recovered as risk appetite recovered in general and on higher demand. As well, oil was partially caught up in the USD carry trade and the idea that it was better to own hard goods rather than paper currency, though this effect was far more pronounced for gold than oil.

Besides the largest exporter, Saudi Arabia, and its unmatched spare capacity, further potential supply expansions come from:

• Brazil: has nearly doubled its production over the last 10 years and has enormous deep water plays that will continue to ramp in coming years

• Nigeria: the government has made overtures to the local rebels who want a share of oil revenues. If the rebels can be placated, a half million barrels /day could quickly come on line

• Angola – where production has doubled in five years and already sits at 2 million barrels per day.

We are firm believers that the earth’s oil endowment is limited and that peak oil may already be upon us now or within the next few years, but the combination of the stable to expanding supply in the short- to medium-term and the shock to consumption in the world’s biggest oil consuming nations in recent years means that enough spare capacity is sloshing around in the world energy system to amply supply the market at the $70 dollar price point as we exit 2009.

As the year wears on, the market may realize this and oil could sell-off back toward $40 a barrel, though that price is unsustainably low for the long term since it would cause widespread carnage on the voracious capital and investment needs oil fields require to keep humming.