Gazprom Predicts Oil Prices of $250 Per Barrel As the Market Soars

Following the IEA’s warning that record oil prices were needed to balance demand with supply, Gazprom has predicted prices of up to $250 per barrel in 2009, but this is more likely due to a weakening dollar than rampant demand. While prices have been rising steadily as a result of supply constraints, there is no sign of a drop off in demand, suggesting that further increases are inevitable.

Oil prices have already hit a record high of $139.89 per barrel and many parties have predicted that they will reach levels of $150 or even higher. Gazprom, which currently operates a mostly gas based business, has forecast that oil will reach $250 per barrel during 2009.

The usually quoted fundamental drivers for rising oil prices are well known: steadily increasing demand worldwide, particularly from the burgeoning Asian market; complications and hold ups with supply; and a limited refinery capacity. However, it is unlikely that the market would be sufficiently sensitive to generate the recent headline grabbing prices in such a short space of time if these were the only factors in consideration.

The value of the dollar has fallen against the euro and other major currencies in recent times and the proliferation of ‘toxic’ sub-prime assets, which have been distributed, predominantly from the US market, have exacerbated current worldwide financial difficulties. As a result, traditional targets of investment have become less attractive, and investors have looked for a secure refuge away from uncertain markets. Many commodities have become expensive as a result, but oil prices receive a great degree of publicity due to their impact on so many sectors of the economy.

OPEC has agreed to marginally increase the supply of oil, but this is not expected to curb the price while speculation and increasing demand are both driving it up. Announcements from Saudi Arabia regarding the production of a further 200,000 barrels per day were greeted with a $2 cut in prices on June 16, 2008, but potential cuts in demand from the US, due to redundancies, generated an increase in the price of oil rather than the expected decrease.

It is clear that despite the dramatic price increases, oil demand is not dropping off markedly. The IEA has warned that record prices will be required to drive down demand to match supply. However, although oil companies or OPEC may openly agree to try to reduce market prices, it is in their ultimate interests to maintain high prices. This is not necessarily due to a desire for excess profits, but could be considered a necessity as high prices are required for the economically viable extraction of oil in harder to reach places, such as deep water. For these reasons, high oil prices are here to stay. Not only has the market shown a willingness to absorb them, but the earnings may also fund the next generation of extraction technologies.

Despite all of this, there is some good news. While oil is traded in dollars, the euro and pound sterling have been making steady progress against the American currency. This means that for these economies, the rate of increase of the price of oil, while still significant, has not been as extreme as in the US.

Therefore, Gazprom’s prediction may be an optimistic one. In support of these forecasts, however, it is expanding into the extraction and supply of oil. While prices are almost certain to increase further with demand, as the dollar begins to stabilize investors should return to more usual markets, and the recent turbulence should subside.