From the October 01, 2010 issue of Futures Magazine • Subscribe!

Energy outlook: Economy rules

Springer, on the other hand, forecasts a weakening economy based on a continued slide of GDP numbers and says crude oil should be in the low $60 per barrel range by year end, absent a geopolitical event.

“The market’s perception right now is that if the economy gets better, oil prices will go up, which is probably what will happen at least initially,” Flynn says. “[However], the economy [could] get better and oil prices go lower [because] we’re going to see the inverse of what drove oil prices up during weak economic times. If the economy gets better, [we’ll] raise interest rates, which means the dollar will get stronger, and a stronger dollar will put downward pressure on oil prices. Once we start to get out of this economic muck, we could see a break in oil prices after the initial rally.” He expects oil prices to go down into the $40 per barrel range by year end.

Analysts believe the economy is key for the dollar and equities, which will drive crude. “The market looks at equities as the leading indicator for GDP. If equities are going up, GDP is going up and oil consumption is going up and vice versa,” Chirichella says. “Unfortunately we’re in the vice versa stage right now. Equities are going down, GDP [is going down] and OPEC’s pumping away, and inventories are going up,” (see “Down and out,” below).

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Chirichella is bearish on oil for the short to medium-term and says that the outcome of midterm elections in the United States could move oil. “If the Republican party takes the House and makes gains in the Senate, that could result in a decent relief rally in equities and equities are so highly correlated to oil that we could see oil prices get to $75-$80 a barrel,” he says, adding that barring that, oil will remain in the trading range of $65-80 for the rest of the year. The EIA puts an almost 50% probability that WTI crude prices will be below $80 a barrel by the end of 2010 (see “Forecasting crude,” below).

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