Oil prices could hear down in new year

Oil prices could hear down in new year

If simple supply and demand determined the price of oil, the price should not have risen to $92 (Rs3,634) a barrel, up 62% from its 2007 low in January. Higher prices have kept demand growth moderate, and there was enough supply to keep inventories at 83 days of demand. That compares with 79 days in 2002.

Simple analysis of supply and demand suggests a lower oil price in 2008. Demand is expected to increase by 1.2 million barrels of oil per day, according to the Organization of the Petroleum Exporting Countries (Opec). That’s less than it might be. A government-mandated 10% increase in fuel prices is tempering Chinese consumption growth, and higher prices and reduced subsidies should have a similar effect elsewhere.

Supply should easily keep up with demand. Recurrent fears of a major disruption of West Asian supply have as yet come to absolutely nothing. War with Iran looks highly unlikely, while Iraqi oil production has surpassed its pre-invasion level for the first time and is expected to grow further in 2008. Outside of West Asia, Opec expects non-Opec production to rise by 1.1 million barrels a day. That analysis is much too simple. But the most obvious complication—economic growth that is slower than currently forecast—also points in the same, downward direction.

The experts seem to be thinking along these lines. The average of 35 forecasts of the average 2008 crude oil price is $75 per barrel, according to Oppenheimer. That is $5 above the expected 2007 average. But if the prediction comes true, 2008 will feel like a down, since the average will have been nearly 20% below the New Year price.

But of course there is more to the oil price than supply and demand. There are the financial players, who control a sizeable but unknown share of current inventory. And there is the cost and availability of credit, which determines how easy it is for customers and speculators to bid up the price.

Credit seems to be tightening everywhere. If financial conditions stay tough, the next oil price surprise just might be the speed of its decline. That would make current .