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CIBC headquarters in Toronto. (image: ctv.ca)
The Canadian investment bank CIBC World Markets has made a bold prediction for where oil prices are headed in the next year and a half: nowhere. The Edmonton Journal reported on Thursday that CIBC’s most recent forecast for WTI crude prices saw prices averaging US$80 per barrel in 2010 and $85 in 2011. The firm’s predictions are based on expectations that oil demand in the US and other major oil-consuming nations will remain sluggish as governments move to cut bloated deficits, thus slowing economic recovery and keeping the world economy’s thirst for oil in check. Comments by CIBC’s chief economist Peter Buchanan told the Financial Post how China, whose booming economy is expected to be the shock that will jolt global oil demand back to life, fit into the prediction:
In booming China, oil demand is likely temporary, the result of “increased consumption by the power sector to offset reduced hydroelectric production resulting from the worst drought to hit the country in a century.”
CIBC’s prediction contrasts with the conventional wisdom among oil analysts, many of whom believe that economic recovery, a resulting spike in oil demand, and climbing prices are just weeks or months away. However, as nasdaq.com reported on Tuesday, the US Department of Energy’s Energy Information Administration recently projected average prices ($80.06 in 2010 and $85.50 in 2011) that are very close to those floated by CIBC. Although the predicted averages were the result of an increase in previous forecasts, the EIA acknowledged the same price-limiting factors voiced by CIBC in an explanation that accompanied the price forecast:
Expectation of a somewhat more robust global economic recovery supports the updated price forecast… the most important downside risk to this forecast is lower-than-expected economic growth.
The predictions read something like two sides of the same coin—both parties agree that an economic recovery will lift prices slightly and slow recovery could limit price increases, but choose to emphasize different sides of the same outlook. Interestingly, CIBC’s prediction contrasts sharply with forecasts by its best-known former employee, Jeff Rubin. Based on a firm belief that cheap and easy-to-reach crude oil supplies are about to run out, Rubin predicted $150 per barrel oil some time in 2011.
But perhaps the most remarkable aspect of CIBC and EIA’s price forecasts is not how low they are but how steady they are. In a ten-day period that saw crude prices fall $10 in fits and starts, it’s hard to imagine prices staying in a general range of $5 over 18 months. Buchanan was keenly aware of this fact, and drew attention to it in an interview:
We’re saying oil prices are going to do something they don’t normally do, which is stay steady.
