Crude price in August 2010

A month ago we presented a forecast for oil price. It’s time to revisit the price. All our estimates are based on the existence of long-term sustainable trends in the differences between various subcategories of the producer price index (PPI). The concept and numerous forecasts is published in this paper. The dry residual is that the producer price indices evolve along straight lines, with all deviations from the trend cancelling themselves out over relatively short periods of several months.

Figure 1 present the case of crude petroleum (domestic production) for the period between 2007 and 2012. We have predicted that the difference between the overall PPI and the index for oil will be on a upward trend since 2009. This means than the PPI will grow faster than the index of oil, the latter likely to fall into 2016 down to the level of ~75.

In March and April 2010, the index of crude petroleum had a bigger deviation out of the trend in Figure 1. Therefore, the most likely next movement in the price will be the return to the trend. Moreover, the difference will likely to break the trend line and go into the other side for several months. This would mean the price of oil falling in May 2010 and during the summer months, as shown in Figure 1 by red circles. Tentatively, we put the index at the level between 160 and 180 in August 2010. Relevant crude oil price will be between $62 and $70 per barrel.

Figure 1. The difference between the overall PPI and the index for crude petroleum. The new predicted trend is shown by dashed line. In May and likely in summer 2010, the index for oil will be decreasing. The difference will be growing as shown by red circles.

P.S. Apparently, oil price lost several dollars in May 2010, and one could say that this post is a bit late and just declares known facts. This is the Bureau of Labor Statistics who reports the PPI and its components in the middle of the next month. Our concept would fail to predict that this is exactly May 2010 when oil price should stop to grow. However, the currently observed level of price is not viable. The price must fall at some point, the larger is the deviation the faster and more violent is the recovery.