The Future for Oil Prices

Steve Polos of Export Development Canada says oil prices are likely to drop:

Oil prices have retreated from record highs, and appear to be heading lower. Was it all a bad dream? Or is this just a short respite before we head to three-digit oil pricing?

The world oil market has been in turmoil for nearly two years. Prices have been driven higher on fears of disruptions to supply – we have had military action in the Middle East, political tensions in Venezuela and Nigeria, and hurricanes in the Gulf of Mexico. All of these developments had the potential to knock oil markets on their heels and send prices into a major upward spiral.

The thing is, it didn’t happen. Despite all those problems, both real and feared, not a single supply disruption has been reported.

... Now, after seeing prices approach $60, and after seeing forecasts of oil prices of $100 per barrel or more, markets seem to be relaxing. Prices have fallen to the $50 range, and look poised to go lower.

... It certainly seems that we have entered an era of higher-priced oil. But suffice to say that oil prices of $100, $50, or even $40 sow the seeds of their own destruction – less demand, and more supply. Expect oil prices to remain high, but to keep trickling down.

Okay. If he says so. I'm not sure I agree, but I cannot make a case to disagree either.

UPDATE: See here for Tom Luongo's case for why we should disagree. I'm not persuaded by it, either [e.g., if world demand is growing, why are no new refineries being built, as he suggests is the case?]

One reason to love futures markets: we can bet with our money on which case we think is stronger.

UPDATE #2: Stephen Ayer of disinterested party agrees with Steve Polos. His case is pretty strong that oil prices will go down over the next year.