Crude oil at $100 in December: August update

In March 2009, we presented a prediction of crude petroleum price for 2009. Briefly, our analysis has shown that oil will overcome $100 per barrel before the end of 2009. As promised, we evaluate this prediction every month, when new readings of producer price index (PPI) with all its components become available. In this article, we report the results for August 2009.

The period between January 2008 and likely the end of 2010 is characterized by an elevated volatility in oil price, but the evolution of the price is not random. Moreover, even after the start of crisis in 2008, the price has been following a predetermined trajectory, as it has been demonstrating since 1980.

In August, the PPI reached the level of 175.1 from 172.7 in July, and the producer price index of crude petroleum (domestic production) increased to 190 after 158.9 in July. Our assumption on the average monthly increment for the crude petroleum index was +20, and for the PPI +1. So, the increase in August was larger than predicted. However, this increase just compensated the fall in the difference observed in July relative to June.

Figure 1 presents the new readings. Overall, the evolution of the difference between the PPI and the index for crude petroleum follows the predetermined path (compare the updated curve to that drawn in June) – from its peak in February 2009 to the bottom of a through, which will likely be reached by December 2009. This is a natural path for a pendulum, as discussed in the previous articles [1], [2]. Hence, there is not sign that the oil price significantly deviates from the predicted trajectory. We expect the price to hit the new (red) trend line in September 2009. This is the level of $73-77 per barrel.

Figure 2 depicts the evolution of crude oil price. Values for the period between September and December 2009 are shown by solid red circles. According to the prediction, the price should break the $100 level before the end of 2009. The next update is expected in October or November 2009.

Figure 1. Evolution of the difference between the PPI and the index for crude petroleum (domestic production). Solid circles – the readings between March and August 2009, which were anticipated in February 2009. Open circles – the predicted difference between September and December 2009. Upper panel – figure from June. Lower panel – August update.

Figure 2. The evolution of crude oil price. Red circles – oil price predicted for the period between July and December 2009. According to the prediction, the price should break the $100 level before the end of 2009.