Why Crude Will Reach $100 / Barrel

In June 2009, we presented a prediction of crude petroleum price for 2009 (Crude Will Reach $100 by December 2009). Briefly, our analysis has shown that oil will overcome $100 per barrel before the end of 2009. As promised, we evaluate the prediction every month, after new readings of producer price index (PPI) with all its components become available. In this article, we report the results for June 2009.

The period between January 2008 and likely the end of 2010 is characterized by an elevated volatility in oil price, but the evolution of the price is not random. Moreover, even after the start of crisis in 2008, the price has been following a predetermined trajectory, as it has been demonstrating since 1980.

The June reading of the PPI shows a rise to 174.1 from 170.2 in May, and the producer price index of crude petroleum (domestic production) has increased by ~32 points: 188.9 after 157 in May.

Our assumption on the average monthly increment for the crude petroleum index was +20, and for the PPI +1. So, the increase in June was larger than predicted. This increment might be compensated by weaker growth in the following months. For example, oil price in the first half of July rather demonstrates a slight decrease.

Figure 1 presents the new readings in a graphical form. The evolution of the difference between the PPI and the index for crude petroleum accurately follows the predetermined path – from its peak in February 2009 to the bottom of a trough, which will likely be reached by December 2009. This is a natural path for a pendulum, as discussed in the previous article. Hence, there is no sign that the oil price deviates from the predicted trajectory.

Figure 2 depicts the evolution of crude oil prices. Values for the period between July and December 2009 are shown by solid red circles. According to the prediction, the price should break the $100 level before the end of 2009.

The next update is expected in a month, when data for July are published.

Figure 1. The evolution of the difference between the PPI and the index for crude petroleum (domestic production).

Solid circles – the readings between March and June 2009, which were anticipated in February 2009.

Open circles – the predicted difference between July and December 2009.

Figure 2. The evolution of crude oil price.

Red circles – oil price predicted for the period between July and December 2009.

According to the prediction, the price should break the $100 level before the end of 2009.

Comments

[Maxe Paul:]

You seem absolutely sure this will occur, which quite frankly worries me.

I predict we will see a Fibonacci number retracement around the high 70's, maybe in the 80's, but i wish you luck all the same as a fellow member of the CBC (crystal ball club).

Jul 15 10:04 AM

[Ivan Kitov:]

As a matter of fact, I will not be disappointed if this prediction is wrong. This is just about links between measured variables. I can do nothing about forces behind such bounds, and do not take this personally. On the other hand, the reported behavior looks very natural for a physicist.

Jul 15 10:39 AM

[Larry House:]

The contradicton is that if the economic outlook is better, helping oil to reach the $100 level, that price of oil would almost surely help to kill the economic recovery. Unless it is moved by far and wide speculation, I just don't see oil reaching $100 this year.

Jul 15 11:15 AM

[Maxe Paul:]

BTW thanks for your links to my questions on gold and copper a while back, i read the material and it backs up the long term bearish case that i believe in.

Many people on SA are obsessed with gold going to new highs in the thousands but i have never bought that argument, keep up the good work Ivan and i look forward to reading more of your research.

Larry if you read more articles by Ivan you will see that indeed that will occur, the economy dying that is.


On Jul 15 10:39 AM Ivan Kitov wrote:

> As a matter of fact, I will not be disappointed if this prediction
> is wrong. This is just about links between measured variables. I
> can do nothing about forces behind such bounds, and do not take this
> personally. On the other hand, the reported behavior looks very natural
> for a physicist.

Jul 15 01:00 PM

[The Greates...:]

You have to have a market for oil to reach $100 a barrel, Hello,
the world is in a down turn and is still reeling from the summer of 08. The global economy is going through some major down sizing and there is no recovery in near sight. I feel oil in the $35-40 range by Dec 09.

Jul 15 04:04 PM

[jerrydd:]

My bet is around $45-55bbl until at least fall then going up some if it's a cold winter. If not then not rising about $70 until late next spring.

To be honest I'm surprised it's as high as it is. But I don't expect $100 oil until next June/July assuming a economic recovery by early 2011.

The problem is will $100-120 oil put us right back into recession just as we are starting to come out of it.

I don't care than much as I drive electric through it would raise my custom EV sales as it did last summer. Sadly for another yr the only way to get an EV is build or have someone build you one..

Jul 15 04:37 PM

[chargers_ru...:]

Excellent article. I think this is a "no brainer" from the data you supplied.Couple that data with the current administrations economic policies concerning the dollar and presto! You may have more than $100.00 per bl. especially if the USA gets any kind of recovery.

Jul 15 08:29 PM

[Bevo:]

Only Chindonesian demand can bring oil up to $100---my guess is more like $75, but who knows. Chinese and Indian demand will be 'driven' by auto sales somewhat for the long term, but the slow U.S. economy will damper Chinese exports.

Jul 15 11:02 PM

[A Barrel Full:]

I do not pretend to understand the technical analysis in the article.

On fundamentals however, I am of the opinion that oil will reach no more than $80 per barrel by year end. It might just as easily be $60.

I don't see much change of $40, unlike some commenters, as producers are mostly struggling to keep output where it is (apart from OPEC)

Jul 16 01:28 AM

[Puerto:]

But the major unknown factor is geo-political upheaval - like Israel attacking Iran [looking increasingly likely]. In such a case, oil would go far higher.

Jul 16 11:10 AM

[Bruce909:]

This is a very interesting analysis. Have you been able to back test it?
Perhaps taking data prior to 1980 and using it to see how well it tracks actual data from 1981 to 1990?

Jul 16 11:30 AM

[Ivan Kitov:]

This is second article in a raw. I am going to update the prediction every month, when PPI data are available.
The first article Crude Will Reach $100 by December 2009 (seekingalpha.com/artic...), also at Seeking Alpha, introduces sustainable trends in PPI differences. It also provides a number of references to publsihed articles and working papers. These sources provide comprehensive description of the period after 1982, when new CPI and PPI were introduced.
I always have a dilemma - to include or not to include common sections describing model and previous results. This time the reference style is not an appropriate one.


On Jul 16 11:30 AM Bruce909 wrote:

> This is a very interesting analysis. Have you been able to back test
> it?
> Perhaps taking data prior to 1980 and using it to see how well it
> tracks actual data from 1981 to 1990?

Jul 16 12:59 PM

[Tony Daltorio:]

Hello, there is a world outside the US. They are doing fairly well, unlike the US. Oil may not go to $100, but $35 oil is only a pipe dream that oil speculators think about. Fundamentals say oil shoould stay in the $50 - $75 range.


On Jul 15 04:04 PM The Greatest Rip Off of our Time wrote:

> You have to have a market for oil to reach $100 a barrel, Hello,
>
> the world is in a down turn and is still reeling from the summer
> of 08. The global economy is going through some major down sizing
> and there is no recovery in near sight. I feel oil in the $35-40
> range by Dec 09.

Jul 16 02:12 PM

[Maxe Paul:]

What people see, think, feel or would like to happen fundamentaly means nothing.

The facts are the facts, oil up then down, it is written in stone if you look close enough. The tools are in front of you.






On Jul 16 02:12 PM Tony Daltorio wrote:

> Hello, there is a world outside the US. They are doing fairly well,
> unlike the US. Oil may not go to $100, but $35 oil is only a pipe
> dream that oil speculators think about. Fundamentals say oil shoould
> stay in the $50 - $75 range.

Jul 16 03:24 PM