Last night, the US Department of Energy’s Energy Information Administration (EIA) made a massive adjustment to its oil-price forecasts for this year… and about time too. Its forecast is getting closer to reality.The EIA said it now expected oil prices to average $101 this year, compared with its previous forecast of $87.

But it’s not just the EIA that are moving up estimates, traditional under-forecasting oil analysts are doing the same too.

In Reuters’ monthly survey of oil-price analysts at the end of March, the average forecast of the 29 analysts surveyed was $90.55, up from $83.77 in February. Five of the analysts in the survey forecast average WTI prices at above $100 a barrel.

So, I reckon consensus numbers still have room to move higher, boosting the oil sector after the upcoming quarterly reporting season. (Note: Our oil play Royal Dutch Shell (LSE: RDSB) posts its quarterly numbers on 29 April).

WTI futures averaged $72.32 per barrel in 2007, with the 2008 estimate at $101. The EIA also issued a 2009 forecast of $92.50.

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The oil price moved ahead on the news yesterday, but eased this morning to stand at $108.22. This move means that the US gasoline market is also expected to tighten as refiners continue to run refineries at low capacity. The crack spread this morning for WTI Cushing fell $0.621 to $8.992. This is bullish for the oil price because refiners won’t operate at full capacity if they cannot make a decent profit from their operations.

The EIA also said that the projected higher costs for crude oil will contribute to higher petroleum product prices (erm, well done for that analysis guys).

Gasoline prices were projected to average $3.36 per gallon in 2008, up 55 cents from last year. Diesel prices are projected to show even larger increases in 2008, averaging $3.62 per gallon, or 74 cents above the 2007 average price. The government department is also predicting spikes to $4 a gallon in the peak summer driving season.

This report makes me even more convinced that oil is likely to stay above $100 a barrel for the majority of the year. In fact, I’m starting to believe that the Reuters’ consensus view, which has significantly lagged real oil prices, will breach the $100 level in the next few months DESPITE the credit contraction and DESPITE predictions for gasoline consumption to fall by 85,000 barrels per day in the peak driving season.

It’s not just me that has this view, the market agrees with me.

Despite the EIA saying demand will fall, the futures strip price, which is the average price of the next 12-months futures contracts, has edged only slightly lower. (Remember: I said yesterday that this is the data used by companies such as Royal Dutch Shell to do their own financial planning.)

Yesterday the strip price stood at $105.90. News of falling demand has reduced this to $105.19.

The Reuters’ consensus for 2008 stands at $90.55, which lags the futures strip price by 16.9%. I prefer the futures strip price and I am therefore convinced that the oil price will stay above $100 for most of the year. Indeed, I said last month that I thought oil was on the way to $120 a barrel. That is still my view.

One other supporting factor from the report was the fact that the decline in US gasoline demand started during the second half of 2007 and has accelerated so far this year. Over this time period, the oil price has soared.

Regards,

Garry White

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