The Outlook for Oil Prices in 2010

Don't Expect Lower Oil Prices for Much Longer

I've heard the demand statistics before.

In fact, I've had readers continually argue that there are fewer cars on the road nowadays, pointing toward rising inventories of motor gasoline.

Those same stats were running through my head as I was stuck in a merciless traffic jam over the weekend. A trip that should have taken me less than two hours turned into a six-hour crawl north to Philadelphia. I waited to see what kind of horrific accident would have caused such a delay...

And yet, each grueling mile passed with no such scene. At one point, people were just standing next to their cars out of frustration. The peak of my frustration was from an hour-long wait right next to a '40mph Minimum Speed' sign.

At the very least, the 80-mile traffic jam gave me time to think. I couldn't help wondering how things will play out - especially once demand recovers.

Of course, the economic upheaval certainly didn't help things. According to the IEA's latest World Energy Outlook, global energy will fall in 2009 first time in 28 years.

Although demand is weak, don't make the mistake of thinking that oil will be replaced anytime soon. I love to hear about renewables growing at a record pace, but the sobering fact is that fossil fuels make up an overwhelming share of global energy. Until I see renewables make a serious dent, I'll stick with other, more realistic options.

2010 Oil Price Forecast

So where are prices headed?

As you can see, oil prices bottomed out last December around $33 per barrel. That price always comes to my mind because it was a few days after OPEC announced another round of production cuts.

Not even the mighty OPEC was able to move the dial much. Prices remained under $40 per barrel throughout the next several months. Over the last four months, prices have stubbornly remained between $70-$80 per barrel.

It was only until fairly recently that oil prices slide below $70 per barrel.

However, I don't see prices remaining below $70 per barrel for much longer. The problem is that below a $70/bbl price tag, new investments simply won't be as attractive. The IEA reported that oil and gas companies slashed their budgets by approximately 20% in 2009 - that comes out to more than $90 billion.

That trend is about to change over the next decade. You can see it for yourself, too. Companies will continue to spend record amounts of money on new investments. Take ExxonMobil, for example. Earlier this month, ExxonMobil announced its plans to spend up to $30 billion annually on energy projects over the next five years.

And it's not just Exxon, either... Trillions of dollars will pour into new energy investments between now and 2030.

But if we've learned anything from 2008, it's the public tolerance for oil prices. If people were suspicious of $100/bbl oil, they were outraged by $147/bbl by July.

A return to triple-digit prices is inevitable; that's also assuming we see a strong demand recovery in the latter half of 2010.

Bridging the Oil Gap

I'd like to hear where you think crude prices are headed next year. As one of my readers said recently, "It's indisputable the world is heading for a huge energy shock."

I couldn't agree more.

But do you honestly feel that oil prices will fall below $60 per barrel?

I just don't see how that would be possible, especially considering the supply threat that peak oil presents. And it's scary to think there are people out there who believe global oil production will reach over 115 million barrels per day by 2030.

Although there are a few bright spots left for U.S. oil production, the only viable move away from oil will be to natural gas. It makes sense. Natural gas happens to be one of the only abundant resources we have left. In fact, I've highlighted one specific area that's managed to completely side-step the financial crisis. You can read the whole report here. Like I've told you many times before - it's only a matter of time.

Of course, the real kicker is that it's clean. I've yet to meet someone that thinks coal will pull through to overtake oil's reign. That simply isn't going to happen. It would feel more like taking a step giant backward, rather than forward.

Until next time,

Keith Kohl

Energy and Capital