Q1: You are a market analyst specializing in the oil industry and have been asked to forecast the likely price of oil in 2012. Carefully explain the reasons behind the forecast
Oil:
Oil is a natural raw material. Today we are totally dependent on oil. It is used as a fuel for machinery and vehicles. It is transformed into different shapes for different kind of usage. Its consumption is increasing day by day all over the world.
Market analyst
A Market Analyst is one who collects and analyzes data to evaluate existing and potential product and service markets. It is their responsibility to identify and monitor competitors and research market conditions or changes in the industry that may affect sales. Market analysis is a process as which involves looking at numerical data and attempting to discern patterns or determine probable future movement based on that data. Market analysis process look at how prices within their specific sector are moving, how the market as a whole is tending, and what individual events might affect the prices of stocks and commodities they are trading in.
Expected price of oil in 2012
Before I forecast the oil price by 2012, we must look at the factors that affect the price. Without taking them in consideration we cannot move ahead.
Like others, price of oil also depends on basic principles of demand and supply. When the demand of oil is higher then supply, price rises. If the supply is higher then the demand then price decreases.
Supply
It is getting more and more difficult to find sources and the search is becoming more expensive. Oil companies need to invest a lot more in finding and delivering than they did in the past.
It seems very difficult in falling of price of oil in couple of next years, and there is a possibility that it will increase in next two years. Now the question regarding supply, which comes across our mind, is who controls it? and what will they do over the next two years.?
Oil producing countries have some key players and the main players (Based on the Volume of Oil Controlled USA, Russia, China and the Organization of Petroleum Exporting Countries (OPEC).
If we look at the Mission of OPEC it lets us see the influence all these countries can have and how it affects the oil price:
OPEC Policy
OPEC seeks to create favorable oil prices for its members by assigning production quotas to its member nations with the goal of limiting the supply of crude oil available on the world market. The ability of the quota system to control price has been questioned because of the well known propensity for OPEC members to produce beyond their assigned production levels.
OPEC has influenced conditions in the petroleum market as buyers and sellers await decisions taken at OPEC meetings, and monitor the institution's behavior. At certain times in its history OPEC has had relatively clear influence on oil prices, as in 1996, when a flood of Saudi crude oil came on the market and drove down prices.
In response to recent price increases, OPEC has maintained that a shortage of crude oil on the world market is not the reason. OPEC has asserted that the market is well supplied, and its actual production has exceeded quota levels.
Demand
Oil demand is predicted to continue to increase despite the high price of oil. There are many sources of demand for oil. As countries develop and industrialize their oil consumption grows with their economy. We can see that global oil consumption has bounced well off until now. We frequently see fluctuation in the demand every year or month in different states or nations.
The demand of oil or consumption of oil based products increase when the economy is strong and we can see a greater number of demand for oil. The developed countries in the world certainly have more affected towards the demand of oil rather then a developing country.
Population growth and density also affect the demand of oil. We have experienced economic turmoil over the past 2 years in America and Europe therefore we would expect the demand to decrease and therefore the price per barrel to also decrease. An examination of the price statistics for this year show great fluctuations in the price ranging from a low of approximately $ 68/Barrel to a high of $88/Barrel.
The climate, the use of alternative energy sources e.g. wind, atomic, bio fuels etc. and energy saving initiatives are other factors that will also affect the demand.
Forecast of oil:
My forecast is therefore based on demand increasing and cost of exploration/extraction increasing and I predict that the average price per barrel in 2012 will increase to $ 80/barrel.
The Price of Oil can vary dramatically over the year therefore my prediction is the average price per barrel for 2012 taking into account the factors described in the previous sections.
My reasoning is as follow:
• The dollar will gain strength against other currencies during the later part of 2011 and 2012 this will affect the profit per barrel.
• New fields are being explore and for sure its costing very high but if we look on other side, we can see that extracting or taking out oil from those new fields can take more then 2 years but OPEC and the other nations do have reserves to cope with the higher demand.
• The economy will grow stronger over the next two years so increase in industry demand can be seen.
• More job vacancies can be offered with the increase in industrial output and therefore more spending/travel by the population can result in more demand
• There is no indication that a major conflict will take place over the next two years and no increase in unrest, however planned troop withdrawal form current conflicts is anticipated. I do not consider this will be a major factor.
• Although countries are pushing forward with alternative energy and fuels this is a relatively slow process and will not reduce the demand significantly over the next two years - I would expect this to be a factor over the next 10 years.
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