Predicting Oil Prices in August 2010

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

A month ago we presented a forecast for oil price. It’s time to revisit the price. All our estimates are based on the existence of long-term sustainable trends in the differences between various subcategories of the producer price index (PPI). The concept and numerous forecasts is published in this paper. The dry residual is that the producer price indices evolve along straight lines, with all deviations from the trend cancelling themselves out over relatively short periods of several months.

Figure 1 present the case of crude petroleum (domestic production) for the period between 2007 and 2012. We have predicted that the difference between the overall PPI and the index for oil has been on an upward trend since 2009. This means than the PPI will grow faster than the index of oil, the latter likely to fall into 2016 down to the level of ~75.

In March and April 2010, the index of crude petroleum had a bigger deviation out of the trend in Figure 1. Therefore, the most likely next movement in the price will be the return to the trend. Moreover, the difference will likely break the trend line and go into the other side for several months. This would mean the price of oil falling in May 2010 and during the summer months, as shown in Figure 1 by red circles. Tentatively, we put the index at the level between 160 and 180 in August 2010. Relevant crude oil price will be between $62 and $70 per barrel.

Figure 1. The difference between the overall PPI and the index for crude petroleum. The new predicted trend is shown by dashed line. In May and likely in the summer 2010, the index for oil will be decreasing. The difference will be growing as shown by red circles.

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