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Economic Forecasts

OPEC Keeps Oil Markets Jittery

Kiplinger's latest forecast on the direction of energy prices

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OPEC has jolted the oil market with its decision to reduce daily oil production by 1.2 million barrels. The price of benchmark West Texas Intermediate crude oil promptly jumped on the news, soaring from $45 per barrel to $51 in just a few trading days. But are oil traders getting ahead of themselves in bidding up prices?

The fine print of OPEC’s agreement is worth studying. Although the group is promising a sizable output cut to reduce high global oil inventories and push up prices, several members were granted exemptions. Nigeria and Libya were left off the hook entirely because their exports have recently been disrupted by terrorist attacks or civil war. Odds are both will substantially increase production now that those issues are fading. Iran, meanwhile, was granted permission to slightly increase its already sizable output, giving Tehran a green light to boost its exports back to where they were before Western sanctions on its oil industry were lifted last year.

Via E-mail: Energy Alerts from Kiplinger

So sticking to the agreement could prove difficult. The OPEC members not granted exemptions will have to cut even more to compensate for the members that will be increasing production. At the same time, OPEC will have to deal with more competition from oil producers in the U.S., who have revved up drilling activity in recent months. After last week’s jump in oil prices, they’ll have even more incentive to drill new wells. OPEC’s bid to lift prices by curbing supply won’t work if those cutbacks are balanced by additional American crude hitting the market.

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We look for WTI to trade from $50 to $55 per barrel in early spring, though prices will no doubt bounce around a lot between now and then.

Gasoline prices figure to climb higher in the wake of OPEC’s move. The national average price of regular unleaded, now $2.18 per gallon, could near $2.30 per gallon in coming weeks. Diesel, now averaging $2.41 per gallon, could hit $2.50 by Christmas.

Natural gas prices are soaring on an outbreak of cold weather, with the benchmark gas futures contract hitting $3.60 per million British thermal units (MMBtu), the highest in about two years. But the price spike might not be sustainable, unless this week’s cold temperatures prove long-lasting. Stockpiles of gas in storage are near record highs, ensuring plenty of supply this winter. If the weather moderates, we look for gas to return to a trading level near $3.25 per MMBtu.

Source: Department of Energy, Price Statistics