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Oil Price Forecast for 2012

Why I Think Byron Wien is Wrong on Oil

Written by Brian Hicks
Posted January 5, 2012 at 7:21PM

Yesterday legendary market strategist and forecaster Byron Wien released his Top 10 Predictions for the coming year.

Byron is the Vice Chairman of Blackstone Advisory Services LP and has made a living making prescient calls on the market. This is the 27th year he has produced the list, which he started in 1986.

On CNBC yesterday, he noted that any given prediction has only a 50% likelihood of occurring.

Last year, eight of his ten predictions came true. That’s pretty darn good — and a solid reason you should listen to what Bryon has to say for 2012. 

For 2011 he predicted an improved housing picture and gold topping $1,600 an ounce...

His forecasts run the entire spectrum of the global markets — from the Arab Spring to a rebound in the American economy.

Without further ado, here are Byron’s Top 10 Predictions.

1. Oil falls to $85 a barrel

The extraction of oil and gas from shale and rock begins to be a game-changer. The price of oil drifts back to $85 a barrel and the United States becomes less dependent on Middle East supply. Deposits in Poland, Ukraine, and elsewhere prove promising as well. Increased production from Libya and Iraq and reduced demand resulting from the slowdown in worldwide economic activity contribute to the price decline.

2. The S&P 500 moves above 1,400

Earnings for American corporations continue to move higher, driving the Standard & Poor’s 500 above 1,400. Raw material prices continue to be soft and business leaders successfully adjust to slower economic growth by using technology to reduce the labor and logistical component of goods and services sold; profit margins stay high.

3. The U.S. economy rebounds

The U.S. economy gets its second wind. Real growth exceeds 3% and the unemployment rate drops below 8%. Recession fears and even “the new normal” view of prolonged slow growth are called into question. Capital spending, exports, and the consumer drive the economy, overcoming fiscal drag. The drop in the price of oil and the rise in the stock market improve both consumer confidence and spending patterns.

4. Obama wins reelection?

The recovering economy and the declining unemployment rate help President Obama convince the voters that he didn’t do such a bad job in his first term after all. He is viewed as a good speaker — but a poor leader who is running against Mitt Romney, viewed as uninspired and whose positions on many issues are unclear. Democrats take back the House of Representatives, but lose the Senate in an anti-incumbent wave.

5. The EU survives

Europe finally develops a broad plan to deal with its sovereign debt problem and moves closer to fiscal cohesion. The European Central Bank, the International Monetary Fund, the European Financial Stability Facility, and the European Union band together to keep all the countries within the Union and to continue the euro as the Continent’s currency. Greece has a major restructuring of its debt. Spain and Ireland strengthen their finances during the year. But Italy suffers a “voluntary” restructuring... A meltdown of the banks is avoided, but imposed austerity causes Europe to suffer a recession.

6. Cyber warfare is the new battleground

The computer replaces conventional armaments as the principal weapon of terrorists and geopolitical adversaries. Eastern European and Asian hackers invade the data banks of major international financial institutions causing temporary bank closures. An alarmed G-20 meets to address the problem.

7. Bullish on solid currencies

Concerned over rapid money supply growth in the developed world, investors buy the currencies of countries that seem to be managing their economies sensibly. Scandinavian currencies, the Australian and Singapore dollar, and the Korean won benefit.

8. National deficit gets cut by $1.2 trillion

Congress decides its dysfunctionality is harmful to both parties and acts before the November election to deal with the failure of the Super Committee to develop a program to reduce the U.S. budget deficit by $1.2 trillion over ten years. Both defense and Medicare are cut significantly; subsidies for agriculture are reduced; and tax deductions for oil, gas, and real estate partnerships are modified. Obama pledges to let some aspects of the Bush tax cut program continue if he is reelected.

9. Regime change in Syria

The Arab Spring finally overcomes Bashar al-Assad, and his family’s rule over Syria ends. While Assad’s fall might have been inevitable, it has important ripple effects throughout the region weakening Hamas, Hezbollah, and further isolating Iran.

10. BRIC reemerges as a market force

After two years of poor stock market performance while their economies came through with high single-digit real growth, the emerging markets finally have a good year. Growth slows somewhat, but favorable valuations enable China, India, and Brazil indexes to appreciate 15%-20%.

I think Wien’s predictions are pretty spot-on.

However, I think his first prediction — oil will drop to $85 a barrel — will not come true.

Yes, it’s true that oil production from shale is a game-changer, particularly in the Bakken in North Dakota...

But if the U.S. economy is headed for a rebound — and if the emerging markets are heading for a rebound — demand for oil will remain high.

Wien’s prediction assumes the new supply coming from domestic oil shale will be sufficient to absorb demand.

Remember, oil from shale is unconventional. So the price has to remain high to make it economical.

Regardless of Wien’s oil price prediction, oil shale is a long-term trend that investors need to be positioned in.

North Dakota is approaching 500,000 barrels of oil per day. And it’s estimated that within 10 years, ND will be producing 700,000 to 1 million barrels per day.

If it reaches that milestone, North Dakota would become a member of top 20 oil producers in the world, just below the United Kingdom.

To give you an idea of the dramatic growth in Bakken drilling, check out this interactive Bakken map.

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Brian Hicks

Brian is a founding member and President of Angel Publishing and investment director for the income and dividend newsletter The Wealth Advisory. He writes about general investment strategies for Wealth Daily and Energy & Capital. Known as the "original bull on America," Brian is also the author of the 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. In addition to writing about the economy, investments and politics, Brian is also a frequent guest on CNBC, Bloomberg, Fox and countless radio shows. For more on Brian, take a look at his editor's page.

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