Why this will be the year of $100 oil

Will the oil price average more than $100 this year? The majority of commodity experts polled by Barclays last month thought so. But what happens if there's a severe economic slowdown?

As we near the end of 2007, we can reflect on a roller coaster ride for the oil price but the main question is: what next?

From a low point of just below $50 per barrel in January, prices almost doubled this year, hitting $99.29 a barrel on November 21.

There is a real risk of recession next year in the US and the UK but I still believe that 2008 will be the year that oil prices move into triple digits and so does Goldman Sachs. The broker issued a note to clients earlier this month that said they thought oil would breach the $100-dollar-a-barrel level, even if there was a recession in the US.

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Goldman is one of the most active banks in the energy market. It was the first broker to predict the spike in the oil price that has happened over the last three years. (The predictions, however, did not come from Arjun Murti, the oil analyst who was the first to call the 21st Century oil spike).

The broker upped its 2008 WTI price forecasts by $10 on December 12, with the average price now seen at $95 a barrel. The investment bank said that the oil price could hit even $105 by the end of 2008.

Will oil average above $100 a barrel?

Around 54% of respondents in a Barclays' survey of 150 commodity investors said they expected the average price of oil over the next five years to top $100 a barrel, with 27% responding that it would be $80-$100 a barrel and 16% expected $60-$80 a barrel.

In its latest outlook statement, the US Energy Information Administration (EIA) said that global oil markets were likely to remain tight. It said that expectations that tight market conditions would persist into 2008 were keeping oil prices high.

Despite the recent OPEC decision to hold production quotas steady and downward revisions to projected consumption growth in 2008, the oil balance outlook remains characterized by rising consumption, modest growth in non-OPEC supply, fairly low surplus capacity, and continuing risks of supply disruptions in a number of major producing nations, according to the EIA.

The main downside risk for the oil process comes from possibility of a sharper-than-expected economic slowdown brought on by the fallout from the unsettled financial markets. This could dampen oil demand and ease oil price pressures.

However, supply issues have kept the oil price high and are likely to continue. There is also no let up in demand growth. West Texas Intermediate (WTI) monthly crude oil prices averaged more than $85 per barrel in October and almost $95 per barrel in November, up $27 and $36 per barrel, respectively, from a year earlier.

As we enter 2008, the oil price will be almost twice the level it was when we entered 2007. I believe it will remain high in 2008, providing the world's economy doesn't completely fall apart.

This article is taken from Garry White's free daily email Garry Writes'.