Price of Oil Forecast 2010 : Fundamental Analysis

Goldman Sachs Group Inc. reported earlier in 2009 that they forecast oil prices to reach between 90 and 95 dollars per barrel in 2010. Here are the reasons why:

1. Recovering economy will demand more oil
2. Investors will purchase oil to hedge against falling dollar
3. Expected energy shortfall with OPEC late 2010
4. Easing credit markets help crude oil storage costs

Essentially, the economy is expected to improve in some respects during 2010, which will lead to increased demand. The falling price of oil in 2008 took many oil production rigs offline, as well as an abrupt halt to new exploration. When the demand increases, OPEC may not be able to bring new oil online quick enough.

Technical Analysis of Crude Oil Prices

The key to the oil market technical analysis is long term support and resistance levels. This is where oil prices have either met with investor buying or selling to support or hold prices. One very long term support rests at just over 50 dollars per barrel. Most do not expect oil to dip this low any time in the near future.

Another key support and resistance level is at 75 dollars per barrel. As of November 30th 2009, oil is trading at exactly this level.

Strong resistance both emotionally and technically from the charts is at 100 dollars per barrel. The economy would need to be extremely robust with few reservations to see trading above these levels.

How to Profit From an Oil Price Forecast

If an investor truly believes that the price of oil will stabilize around 75 per barrel in the short term, and mildly increase to just under 100 dollars per barrel during 2010, how should he trade it?

Buying a futures contract on oil is one method, but this would leave one open to unlimited risk of the unexpected falling price of crude. If this method were tried, the investor would do well to offset his risk by purchasing long term put options against his volatile futures contract.

Another method would be to employ the bull call spread. This requires purchasing a long term oil futures call option contract at the price of 80 dollars per barrel while selling the same time frame call options contract at 100 dollars per barrel.

However an investor wishes to trade the black gold commodity, much value can be gained by predicting and forecasting the price of oil in 2010.

Sources

Stephen Voss, “Goldman Raises Year-End Crude Forecast by 31% to $85(Update 3)”, 4 June 2009, Bloomberg.

Bill Connerly, “Oil Price Forecast for 2010”, 29 August 2009, Oregon Business Report.