While some analysts are skeptical about commodity prices having future stability, others forecast prices moving slightly upward. Martin King, an analyst with Alberta-based FirstEnergy Capital Corp., reports the firm is taking a leap of faith and increasing its expectations for oil prices through 2007. For 2005, he expects an average price of US$55 per barrel, US$5 higher than his previous outlook. For 2006 and 2007, he forecasts US$60 and US$61, respectively, up from US$52 and US$54. In looking at crude oil prices beyond 2007, he anticipates a steady decline down to around the US$47 range post-2010. "Supply can no longer influence the market to yield lower prices," King reports. "As such, the market has become one in which demand will be the pure determinant of price at the margin for 2005 and 2006 at a minimum. The tentative signs so far suggest demand slowing may be taking place at crude oil prices in the range of US$60 per barrel. "However, we are keeping the door open to the possibility that a significant demand slowdown may require much higher crude oil prices. possibly in the range of the high US$60s or low US$70s per barrel." As a play off the increased expectations for oil prices, King has also raised his gas-price forecast for the same time frame. For 2005, his price expectation is US$7.25 per million Btu, up from US$7. For 2006 and 2007, the price forecast is US$7.75 and US$8, respectively, up from US$7.50 and US$7.75. After 2007, his price outlook is the same, with the expectation that prices will level off at about US$6.25 by 2010. Weaker supply growth coupled with the demand loads being used in power generation and economic growth has King projecting that gas storage levels in the U.S. and Canada will only reach historic averages by October. As a result, gas prices could creep well above the US$8 range he expects for the coming heating season. In the ongoing fight between oil demand and pricing, King says it will be difficult to predict the ultimate winner. On one hand, there is world crude oil demand at 85 million barrels per day; on the other is crude oil pricing coming in at $5.1 billion per day or roughly $60 per barrel. "The winner," King says, "will have the bragging rights to the prize of supremacy over the global crude oil market." In 2004, daily world oil demand crushed supply by growing 2.7 million barrels, and is expected to grow a further 2 million in 2005, he reports. In late 2004 and early 2005 the strength in demand pushed supply's ability to meet it to nearly zero. King anticipates that 2005-06 spare wellhead crude oil and natural gas liquids supply capacity worldwide will also be near zero. "As such, demand has won and the market has become one in which demand will be the pure determinant of price at the margin for 2005 and 2006 at a minimum," he adds. "Supply can no longer influence the market to yield lower prices. Our two remaining fighters, demand and price, each boast an impressive array of swerves, moves and uppercuts at their disposal." King says some of the factors working in demand's favor are: historically low interest rates to provide impetus to broad economic activity; low inflation worldwide to keep further large interest rate increases at bay; still evident signs of robust oil demand growth in North America, Asia and Latin America; downstream refining capacity now stretched to the limit; days of forward-cover in refined products are still in line with historical levels; and a potential revaluation of the Chinese yuan this year may cheapen crude oil for Chinese buyers, potentially spurring increased demand. On the flip side, King says many Asian economies and other developing nations are reducing fuel subsidies to crimp demand and reduce budget burdens; further signs of economic slowdown have emerged in Europe and Japan; sales of large vehicles in North America, have slowed while sales of smaller, hybrid fuel vehicles have grown; more fuel surcharges are being introduced by transportation firms to shift the burden of higher fuel costs to the consumer; and there has been steady appreciation of the U.S. dollar this year, which has raised the price of oil realized by other currency spenders. So which will come out on top? "One thing for sure is that at mid-2005, with crude oil prices flirting around the US$60-per-barrel level, the outcome is still unclear." The outcome is so murky that prices-to-date in 2005, and a lack of any significant demand response to crude oil prices that have already been higher than previously forecast, have resulted in King raising overall expectations, he says. While his crude oil price expectations have undergone vast changes during the past two quarters, the market is dealing with oil prices that are almost 50% higher than projected in early 2005. "Much of our logic was laid out in our previous quarterly analysis in terms of slow supply growth and little initial sensitivity of demand to prices. None of this has changed... "... we are now expecting that effective spare wellhead capacity will remain close to zero for an even longer period of time than originally thought, after contemplating slower capacity growth in OPEC and the potential for zero supply/capacity growth in North America. In this sense, supply is sitting on the sidelines watching our epic fight, and rooting for prices."

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