[Peakoil] Oil prices to remain high in 2007

[Antony Barry]

Oil prices to remain high in 2007
Tuesday Jan 2 15:01 AEDT

The record oil prices of 2006 are not expected to be repeated in 2007.

But they will be high enough to fill the coffers of the oil companies  
and draw the ire of motorists.

Oil prices eclipsed the highs of 2005 and came close to hitting $US80  
a barrel in 2006, peaking at a record $US79.45 in 2006.

Tensions in the Middle East - a key oil producing region - continuing  
supply concerns and an expected devastating hurricane season in the  
US all played their part.

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While the hurricanes failed to materialise, the effects of Hurricane  
Katrina, which devastated the Gulf of Mexico 12 months earlier, was  
enough for the market to factor in a premium in anticipation.

Weather is largely unpredictable, and to a certain degree so are  
geopolitical tensions, but Macquarie Equities energy analyst Andrew  
Blakely says we can expect to more of the same in 2007.

"The same things that apply to 2006 apply to 2007, none of the  
geopolitical tensions have disappeared, none of the weather drivers  
have disappeared," he said.

"2006 was heralded as being a very disastrous hurricane season and it  
turned out to be very benign.

"The forecasters are suggesting 2007 will be a terrible hurricane  
season, but I think this time the market is more likely to wait and  
see rather than react before that."

The weather will play a big role in determining how the oil market  
performs early in 2007 as the North American market, which is in the  
midst of winter, drives up demand for heating oil.

"At the moment the market is very focused on short-term inventories,  
and particularly very focused on weather conditions in the US which  
are quite mild," Mr Blakely said.

Once the weather outlook settles in North America, the oil price will  
be influenced by the market fundamentals of supply and demand.

Demand from China and the health of the US economy will also shape  
the outlook for the oil price.

"We see 2007 demand in China staying relatively robust," Mr Blakely  
said.

"Barring a massive slowdown in the US economy, I don't see a massive  
reduction in demand in the US.

"I don't believe there has been a fundamental change in supply and  
demand," he said.

"I still think there is a certain level of tightness in the market  
that suggest that prices are unlikely to come off particularly  
aggressively."

Mr Blakely has forecast an oil price between $US60 to $US70 a barrel  
for 2007.

Fat Prophets analyst Gavin Wendt was more bullish in his outlook and  
said the price would get close to the record highs of 2006.

"In my view, I think they are going to get pretty close to where they  
were in 2006, demand is still very strong," he said.

"When we come out of the winter in early 2007 the price will probably  
drop away again, and then it will start to pick up as we head towards  
the Northern Hemisphere summer."

On the supply front, continuing uncertainties in Russia and conflict  
in Nigeria - Africa's largest oil producer - are also putting upwards  
pressure on the oil price.

The peak oil body OPEC has pledged to cut production in a bid to  
maintain a buoyant oil price.

Mr Wendt said geopolitical and supply concerns, particularly in the  
Middle East, would continue into 2007.

"Iran is still around with its nuclear program and we've still got  
issues going on in Nigeria, which seems to be getting worse rather  
than getting better," Mr Wendt said.

"Nigeria is certainly Africa's biggest supplier of oil and one of the  
biggest in OPEC.

"Again all these little supply disruptions, or potential supply  
things, all start to add up.

"I think we are going to see strong oil prices next year. I don't  
think anything has fundamentally changed between 2007 and what we  
have seen happened over the course of 2006."

Brokerage firm UBS has forecast a strong year for the oil market and  
expects demand in 2007 to outstrip that experience in 2006.

"We expect oil global demand to grow at a higher rate in 2007, than  
in 2006," UBS said in a client note.

"Combined with ongoing problems on the supply side and OPEC's  
willingness to defend prices with production cuts, we think the  
outlook remains positive for prices."

The booming oil price has allowed many oil companies to post record  
profits.

Australia's biggest independent oil and gas producer, Woodside  
Petroleum, posted a record net profit of $1.037 billion, while Santos  
more than doubled its net profit to $762 million.

Man Financial analyst Anthony Anderson said the oil price won't hit  
the highs of 2006 but could come close to hitting $US70 a barrel.

"I don't think it will come close to those record highs," Mr Anderson  
said.

"I think people who thought it would return back to $US40 a barrel  
have given up on that idea, and it is in a trading range of mid $US55  
to high $US60s a barrel," he said.

"It is probably a little bit overdone and world growth is slowing  
down a bit ... I don't think we'll see the halcyon highs again, but I  
think it is well supported at these lower levels."

Mr Anderson said the Australian oil sector could consolidate in 2007  
and noted Woodside as potential prey.

"The market is probably due for a bit of reconstruction," he said.

"We've seen the Hardman Resources bid, there maybe a little bit of  
merger and acquisition activity in that sector."

While the oil companies cash in and executives line their pockets,  
there is minimal relief in sight for motorists, with the days of  
petrol below a dollar a litre over, at least for 2007.

Service Station Association chief executive Ron Bowden said that,  
based on an oil price forecast between $US60 and $US70 a barrel,  
motorists could pay between $1.10 and $1.30 a litre in 2007.

"Compared to what we had in the middle of the year, where we ranged  
between $1.30 and $1.40, I believe we've got some relief," Mr Bowden  
said.

©AAP 2007

Source: <http://news.ninemsn.com.au/article.aspx?id=79117>

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