Building optimism about the world economy caused oil prices to rebound to the mid $60s per barrel from recent short-term lows, but some analysts believe oil could dive again this year.
Grain and oilseed prices have been strongly influenced by crude oil prices since crop-based biofuel became an important fuel and investment funds began to see commodities as a good investment.
So predictions of an oil price collapse have implications for grain prices.
Last week, University of Calgary professor and oil analyst Philip Verleger said crude could drop to $20 US per barrel this year on slow economic recovery and a rising surplus of oil.
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The OECD/FAO are forecasting that 27% of the global cereals crop will go to biofuels and other industrial purposes by 2034.
Others, like Barclays Plc, predict that oil could climb to $70 or more by year end.
Supporting Verleger is the fact world oil demand is about 83.8 million barrels per day, down 1.6 million barrels per day from last year, according to the Organization of Petroleum Exporting Countries.
About 80 million barrels of surplus oil already sit in ocean going tankers, let alone millions more in land-based storage. Industrial and consumer demand is not rising as the economy struggles out of recession.
Verleger believes the oil surplus will outgrow the capacity to store it, particularly if the winter is warm, leading to a price collapse to $20 per barrel. That is lower than the low set in March.
On the other hand, oil bulls say stimulous spending in China appears to be increasing oil demand there and for the last eight weeks Chinese refiners have reported increased operating rates. Also, there are glimmers that the U.S. has hit bottom and economic activity appears to be picking up.
However, I believe even if demand starts to rebuild this year, it will not challenge all the available stored surplus and excess pumping capacity.
It will be 2010 before demand really begins to rebuild and OPEC demand will return to pre-recession levels only in 2013, so a significantly price rally is unlikely. But is $20 per barrel likely? OPEC is already talking about more production cuts when it meets in September. Who knows if that will be enough to maintain a price floor?
All I can suggest is that the potential for lower oil prices appears stronger than the potential for higher prices.
