Will the oil price reach $100-a-barrel in 2006?

The supply and demand dynamics of the oil market remain unchanged. Saudi Arabia repeatedly promises sufficient crude to balance the market, but that is not really the issue.

For the problem is a shortage of refinery capacity around the world. Present refineries are ageing and working at full capacity. To design and commission new ones will take at least five years, and most probably a lot longer given environmental and other considerations.

On the other hand, demand continues to surge with the Chinese and US economies still growing strongly, and even Germany and Japan showing signs of picking up speed. There is an immediate correlation between economic growth and demand for energy.

Higher prices

This supply and demand equation points to an obvious outcome: higher and higher oil prices. At some level oil prices will become too high for consumer nations to bear, and a recession will cut demand; until then the only way for oil prices to move is up.

The oil market is also not short of additional factors pushing prices higher from rebels in Nigeria to political problems in Venezuela. The ongoing row over Iran's nuclear program is watched nervously by oil analysts, who worry about any threat to Opec's second biggest producer with four million barrels-a-ay.

Or consider the plunge in winter temperatures to record lows in Russia, fortunately balanced by warmer than usual weather in the US right now, but already impacting on gas supplied to Europe.

Oil analysts weigh up these various factors and there is a consensus that says a combination of any two or three adverse developments could easily send oil above $150-a-barrel. Indeed, the formerly ambitious target price of $105-a-barrel set by Goldman Sachs now looks rather measly.

Charts say $80 peak

Chartists can also point to an established upward pattern in oil prices which would give us an upside of around $80-a-barrel in 2006. The question is whether oil spikes suddenly higher as it has in the past in similar circumstances when subject to unexpected events.

Indeed, the sole economic factor that would crush the present momentum in the oil market might be mayhem in the financial markets and an economic slowdown or recession. The sudden slump in Tokyo stocks after the Internet share scandal came to light is a reminder that unexpected events can spook capital markets, especially with their current overblown valuation levels.

But any indication of a recession in prospect would be an indicator of lower oil demand to come, and that would have an immediate impact on the price. In the absence of such an indicator, higher oil prices look inevitable and the prospect of a major spike in prices is strong.