Oil could top $100 a barrel by the end of 2008

Clients looking to cash in on Canada’s oil sands will be happy to hear that the price of a barrel of oil could top $100 by the end of next year.

At least that’s what a new CIBC report predicts. Jeff Rubin, chief economist and chief strategist at CIBC World Markets, says major oil-producing countries are dipping into their own supply instead of exporting it as much as they used to.

“All of a sudden, major oil-producing countries are becoming major oil-consuming countries,” he says, adding that cheap gasoline in places like Venezuela and Iran is creating strong domestic demand.

The report also notes that oil supply is diminishing in developed countries despite an increase in consumption, and as a result, crude exports could drop by 2.5 million barrels a day between now and 2010.

“It’s far from obvious who will fill that supply gap,” says Rubin. “What is obvious is that if that gap isn’t filled, not only are triple-digit oil prices on the horizon but, even more problematic, [they] are here to stay.”

Rubin’s not the only one who thinks the price of oil still has room to rise. Dean Orrico, managing director and chief information officer at Toronto-based Middlefield Group, says declining oil supply and strong demand will push prices higher. “I don’t know if it will reach $100,” he says, “but oil prices will touch the $80 mark.”

Despite oil sitting at about $75 a barrel, hitting that $100 price point could happen sooner than later, especially if there’s trouble in the Middle East or if another hurricane tears through America.

“This doesn’t take into account any supply disruption,” says Orrico. He adds that 50% of the world’s oil comes from politically unstable countries like Iran, Saudi Arabia and Russia, so supply disruptions are “more likely than less likely.”

Chris Holden, a portfolio manager at Investors Group, isn’t counting on oil spiking to such lofty heights, but he doesn’t expect prices to drop either. “We’ll find out soon enough if gas demand decreases,” he says. “I don’t think it has, and it won’t this summer. The economy is still doing fairly well — inflation is in check, and job demand growth has been strong.”

High oil prices, while bad for the consumer, could mean dollar signs for the investor. Both Holden and Orrico say Canadian companies are poised to benefit the most from an oil price increase.

“Canada is well positioned, as we are the only source of growth in oil production in any country in the world,” explains Orrico.

“I think if you have any kind of sustained pricing at this level, the attraction for Canadian oil in the global market becomes really self-evident,” adds Holden. “People have been kicked out of Venezuela; they’re losing people in Nigeria. Even though cost dynamics are more expensive in Canada, we can go in and be part of a 200,000 barrel a day project that will last 40 years in a safe jurisdiction. That has an attraction to everyone in the oil industry.”

If Canada’s oil sands can ramp up production, stock prices will go up, and as Richard Nield, a portfolio manager at AIM Trimark, says, “it would help everybody.”

But it might not help the average consumer, and that’s where the trouble for investors lies. If oil hits $100 a barrel, there’s a good chance that prices will drop due to demand destruction.

“Consumers have been able to digest over $3 a gallon [for gasoline in the U.S.],” says Nield. “On $100 a barrel, you’re looking at $4 a gallon at the pump.”

“When it hits the $100 level,” says Holden, “that’s what I would consider a clearing point for demand destruction, but you still see people commuting, and it’s one person in a car.”

Orrico says demand destruction could come earlier. “If oil prices stay above $80 over an extended period, you’ll see demand destruction and see oil prices go back down in the $60 to $80 range.”

Clearly, it’s too early to tell what exactly will happen in the oil sector, but, Nield says, we might get a clearer picture come September. “The key will be this fall, once we get through driving season,” he says, “[especially] if refinery capacity comes on and if things get better in Nigeria and the Middle East.”

If current events turn toward the positive — “less mention of terrorism and prices tend to go down,” says Nield — then maybe oil prices will drop and consumers, though maybe not investors, will get to save some cash.

Still, it’s doubtful the world will see the same prices it saw at the beginning of the year, when oil was at $50 a barrel. “We could see some weakening there,” says Nield. “But at this point I wouldn’t expect prices to crash by any means.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(07/18/07)

Bryan Borzykowski