Figure 1 Oil supply - demand - price chart, Jan. 2002 to Nov. 2009.
In February this year, global oil production / demand hit an interim low of 84.0 million barrels per day (mmbpd) and the average price of West Texas Intermediate (WTI) that month was $39.16 / bbl. Since then, demand has recovered to 85.9 mmbpd in November and the average price was $78.08 / bbl. A rise in demand of 2.3% has led to an oil price rise of 99.4%.
Full explanation of the chart and a discussion of what 2010 might have in store is below the fold.
Every year about this time I meet with an old university friend, who is also a geologist, and we make a bet on where the oil price will be in a year's time. My "forecast" from a year ago:
My forecast is $80, based more on hope than anything else.
My friend bet $55 and so, with Brent on $71.50 (17 Dec 2009) it looks like I will win that pint of beer this year, based more on luck than anything else. It has always been near impossible to forecast the oil price, but since 2002 we have entered a supply constrained situation where the relationship between supply, demand and price seems to allow a more informed approach to predicting the future. So what does that chart up top tell us?
Supply, demand and price
The chart up top is based on this simple model presented by Phil Hart in this rather excellent post.
Figure 2 Phil Hart's oil price, supply, demand model.
It remains a source of great surprise for me that the monthly average production and price data for the last 8 years still fits this model. There are a number of wild card variables that one might expect to produce significant deviations, such as variable OPEC spare capacity, changes to global productive capacity, speculation and currency fluctuations. And yet the data fit this simple model remarkably well.
Figure 3 Oil price and supply. Oil price data from Economagic.
The chart up top (Figure 1) is a simple cross plot of the data plotted above (Figure 3). Figure 1 is a time series of monthly average oil price and production…
