Kiran Stacey Moody’s predicts high oil price for 2011

Analysts are currently rushing out their forecasts for 2011, and one thing that almost everyone seems agreed on is this: oil prices will remain high.

Last week, Barclays predicted that oil would hit $100/barrel at points during the next year. Today, Moody’s has made a slightly lower prediction, saying that it expected prices to average around $80/barrel over the year. (It is worth pointing out that these two are not mutually exclusive).

As ever, the driving factor is Chiinese demand:

Oil finally moved sharply higher late in the year, thanks to continued strength in Asia (particularly China), a weaker US dollar and an improving outlook for western economies…

We expect these fundamental and technical dynamics to continue in 2011, keeping oil prices strong.

The US dollar and the outlook for western economies are not very certain, but the strength of Chinese demand is difficult to dispute. Pretty much the only thing that could knock the oil price off course is a second global recession.

But the difference between $80 and $100 a barrel is, of course, crucial.

Opec says it is “comfortable” with oil in a range of $70-$80 a barrel. But if it stays above $90 for the rest of the year, the EU will be paying 2.1 per cent of GDP for oil imports – close to the 2.2 per cent level paid in 2008, just before the crisis. That is the kind of level that led the IEA last week to warn of the possibility of another crisis.

The question now appears to be, not, “Which way is the oil price heading?” but, “How high can it go and what will be the consequences?”