Why Crude Will Reach $100 / Barrel

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Includes: DBO, OIH, OIL, USO, XLE
by: Ivan Kitov

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.