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Why it's hard to predict oil prices

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Staff writer ▼ | April 5, 2009
oilThe lack of data about oil demand makes oil price prediction almost impossible.


In the wake of global crisis almost all investment banks, hedge funds and individual investors realized that American dollar is falling down and started to look for a shelter in oil. The continuous fall of U.S. dollar was hedged by oil which price was rising constantly. To buy a barrel or two seemed a very safe trade.

Then, two major players stepped on the stage: China and India. Those are two giant countries that need enormous amounts of oil. They are now very industrialized countries with the economies that grow some 10 percent a year and that growth results in huge incomes. Since the domestic refineries were unable to produce enough oil and gasoline, the import was the only solution.

China, for example, needed 3,000,000 barrels, today 10,000,000 - in a single day. Thus, the prices went straight to the sky. Add to that all kinds of state subventions and you have two huge economies with enormous appetite for oil. Consequently, all major player bought huge amounts of oil and in one point there was not enough oil. Following them, all investors, small and large, started to buy oil and the price skyrocketed. However, the price has its limit. When the price reached $150, there were no more room for profit at buyers. At that point, such a high price wasn't good for anyone.

The turnaround was obvious and it happened very quickly: the price of oil started to fall rapidly until it fell to $40. The same experts who predicted the price above $200, now predicts the oil price below $20. They were wrong then and they are wrong now. Why? The answer is simple: there are no data about demand. The oil market is wrapped in a mystery and the demand can't be seen clearly. The only thing an investor can do is to try a good buy in a short term. In the long run, we don't know what will happen, we can try to tell the future but we saw it's just guessing.

The price of oil must be balanced. If it's too high, there will be no buyers, or the buyers will go to bankruptcy. If it's too low, there's no profit for oil companies. Unfortunately, we must take the politics in the equation. Russia is a very big global player and it lives because of oil. In the Middle East there are no fear that oil fields will dry out, but there must be a fine balance between economy and politics. In the United States of America, major companies must decided will they develop green technologies or stay close to oil. On the other hand, Europe follows what's happening in the Middle East.

Which price would be good for everybody? There's no recipe for that, but today's guess is $40. However, it's just an educated guess.

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