Forecast sees $60 oil

A new forecast suggests oil prices (CL-FT82.080.140.17%) will decline by the end of 2011 to about $60 (U.S.) a barrel.

The projection today by Julian Jessop, chief international economist at Capital Economics, is based on his belief that the U.S. dollar will strengthen and global demand for crude will probably “disappoint.” This is despite the fact such a move would bring the price below the range of $70 to $80 that some members of OPEC support.

“Since the U.S. currency began to slide in May, the OPEC basket price has climbed from $68 to $80 per barrel, an increase of around 18 per cent,” Mr. Jessop wrote. “But oil has risen by just 6 per cent in sterling and yen terms, and by only 3 per cent or so in euros.”

More bullish projections tend to be based on “rapid growth” in demand from emerging countries, he said, but he doesn’t see that happening.

“It is hard to see why demand pressures should be much stronger now than was the case in 2007, when both advanced and developing economies had been booming for four years,” Mr. Jessop added. “Oil prices averaged $60 per barrel in the first half of 2007, which is where we think they could settle in the next few years as well. Admittedly, prices then rose to nearly $150 per barrel in 2008, but that proved to be a bubble.”

As for the OPEC target, Mr. Jessop described that as simply the “indication of the range” deemed fair by Saudia Arabia. And unlike several years ago, when the formal target was $22 to $28, there is no enforcement mechanism and compliance among OPEC members on production quotas appears to be slipping.

“The fact that not so long ago OPEC thought a price as low as $22 to $28 was defensible illustrates the difficulty of setting and maintaining a fixed target for oil prices.”

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