Could oil hit $105 in 2006?

Just a month or so ago, the oil bears were feeling pleased with themselves. Having hit a high of $70 a barrel in August, the oil price fell, and pulled back to $56 during December. But could it hit $105 during 2006?

Only a few weeks ago, the oil bears were feeling pleased with themselves. Having hit a high of $70 a barrel in August, the oil price fell, and pulled back to $56 earlier this month.

The bears thought it would keep falling. There was, they said, lots of oil about and the huge spike in the price earlier in the year was just down to speculative hysteria. It seems they were wrong.

Today, oil is back up above $61 a barrel and trading at five-week highs. The fact is that there just isn't enough oil for prices to stay low, however much the bears want there to be. The International Energy Association (IEA) has just revised its third-quarter 2005 estimates for demand up by 300,000 barrels, while in the US, demand rose by 80,000 barrels in September alone. And with colder than normal weather forecast in America for the winter and snow storms hitting the northeast, we can expect that trend to continue through December.

The IEA says the price is set to go higher as demand surges in the northern hemisphere. The fundamentals remain strong, promising plenty more upside for the oil price next year. Strong demand from India and China means that consumption will increase by near on two million barrels a day in 2006. Yet supply is still constrained, says Forbes magazine. Opec is pumping at full capacity and Barclays Capital expects supply from non-Opec producers to fall short of expectations next year. Add it all up and it's hard to disagree with this week's suggestion from Goldman Sachs that the oil price could hit $105 in 2006.

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