Oil Prices Set to Surge to $90 a Barrel by Midyear, Retest Record High in 2011

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In its 2010 forecast series, Money Morning predicted the price of oil would reach $100 a barrel by the end of the year. And while crude prices stalled in January, a growing body of evidence suggests that call may not be far off.

Oil prices rose above $80 a barrel for the first time ever on Sept. 13, 2007. From there they jumped 84% to $147 a barrel in July 2008. Then, in 2009, they surged more than 133% from a low of $34.03 a barrel in February to $79.39 a barrel at the end of December.

The price of crude again topped out above the $80 a barrel mark in early January, but has since slid back down to about $75 a barrel. However, some analysts believe that this is just period of temporary cooling before prices reignite and soar to $90 by midyear, and as high as $200 a barrel by 2012.

"It's safe to say that we'll see triple-digit oil prices by the fourth quarter of this year," Jeff Rubin, the former CIBC World Markets Inc. chief economist who accurately predicted oil's surge during the last decade, said in an interview with Bloomberg News. "I would expect prices to move pretty close to that level, and be in the $90 range probably by the end of March."

Accelerating demand in Asia and the Middle East will be the driving force behind that price surge, Rubin said.

Technical analysis also points to significantly higher oil prices. Oil futures are set to reach $89.84, which corresponds to the 50% Fibonacci retracement of the range generated by the record high of $147.27 on July 11, 2008, and the low of $32.40 touched on Dec. 19, 2008, according to New York brokerage Auerback Grayson.

"We continue to see higher highs and higher lows, which signals that we're in an uptrend," Richard Ross, an analyst at Auerbach Grayson, told Bloomberg. "There's been a lot of sound and fury recently with $12 moves higher or lower. We're still looking at a violent grind higher."

Morgan Stanley (NYSE: MS) analyst Hussein Allidina said in a Jan. 25 research note that prices will reach $95 a barrel by the end of the year, and average $100 a barrel in 2011.

"We expect that fundamentals will continue to improve," said Allidina. "Our increased 2011 price reflects an improved GDP outlook that will require a higher price to ration demand to meet inadequate supply."

Global oil demand is set to grow by 1.7 million barrels per day (bpd) and global gross domestic product (GDP) will expand by 4%, according to Morgan Stanley.

Driving Demand

A resurgent greenback and fears that China would move to cool its economic growth kept crude from advancing in January. But optimism surrounding a nascent global recovery and stronger demand in Asia, which is driving that recovery, will carry prices higher in the months ahead.

The U.S. economy, while still hampered by high unemployment, has shown some signs of improvement. The Commerce Department on Friday said U .S. GDP expanded at a 5.7% annual rate in the fourth quarter, exceeding most estimates. And on Monday, the Institute for Supply Management said its manufacturing index climbed to 58.4% in January from 54.9% in December. That reading was the highest since August 2004. Also, consumer spending rose 0.2% in December, pushed by a 0.4% rise in income.

All of this data helped oil prices crawl back from one-month low, and if Friday's employment report surprises to the upside, oil prices could gain serious momentum.

"We can't rule out further gains toward the $80 area by week's end if the employment numbers provide a bullish shocker," Jim Ritterbusch of trading advisory firm Ritterbusch and Associates said in a note. But regardless of whether or not the U.S. recovery picks up pace, oil prices are still likely to benefit from rising demand in Asia, where the recovery has already reach a fevered pitch.

China's economy expanded by 10.7% year-over-year in the fourth quarter as most of the world continued to struggle with the aftermath of 2008's financial crisis. For the full year, the nation's gross domestic product (GDP) grew 8.7%.

And while in the past exports have been the lifeblood of the Chinese economy, virtually all of last year's growth was homegrown - the result of a $586 billion (2 trillion yuan) stimulus package that spurred lending and drove massive investments in infrastructure.

China's industrial production in December increased by 18.5% and retail sales rose 17.5%, according to the National Bureau of Statistics. And it's unlikely that that growth - or the Red Dragon's thirst for oil - will slow down anytime soon.

China's apparent oil demand in December jumped 16.1% from a year ago to 34.5 million metric tons, or 8.16 million bpd, a Platts analysis of official data showed on January 22. For the full year 2009, China's apparent oil demand climbed to 389.84 million metric tons, or 7.82 million bpd, up nearly 6.6% from 2008. China's crude imports hit an all-time high of 21.26 million metric tons or nearly 5.01 million bpd in December. However, the nation's net imports of oil could surge more than 40% from last year to around 19.5 million metric tons per month in the next two or three months due to high crude runs and expanding stockpiling facilities, Xinhua said, citing unnamed Chinese oil experts.

China's economic planning agency predicted that international oil prices would average $80 a barrel this year - about 25% higher than last year

Like Morgan Stanley, Goldman Sachs Group Inc. (NYSE: GS) thinks average oil prices could be even higher than China's forecast, at $90 a barrel this year.

After that, the sky is the limit, according to Jeff Rubin, the former CIBC World Markets Inc. analyst.

"When we get into 2011 or 2012 and we start to deal with prices of $120 a barrel, $147 a barrel, $160 a barrel, that's where I think at least the global economy becomes very challenged," he said.

Oil for March delivery fell 25 cents, or 0.3%, yesterday (Wednesday) to settle at $76.98 a barrel on the New York Mercantile Exchange (NYMEX).

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