Oil Prices Could Stay Above $100 a Barrel Through 2012

With Iran threatening to cut off about a fifth of the world’s oil supply by closing the Strait of Hormuz while unrest in Iraq continues to endanger the nation’s ability to increase production, economists say high gas prices will probably be sticking around in 2012.

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Financial analysts say prices for two important oil benchmarks — West Texas Intermediate and Brent crude — will average from $100 to $120 a barrel next year.

Weakened demand has helped lower gasoline prices 70 cents since May, to a national average of $3.24, as American consumers drive less and buy more fuel-efficient cars.

But the U.S. and European union are pressuring Iran to end its nuclear program, and in recent weeks, have openly discussed the real possibility of imposing sanctions against Iranian oil exports.

President Barack Obama is preparing to sign legislation that, if fully enforced, could impose harsh penalties on all buyers of Iran’s oil, with the aim of severely impeding Iran’s ability to sell it. The EU may impose a boycott on Iranian oil.

Iran has continued to refuse to end its nuclear program, despite four rounds of sanctions imposed by the United Nations Security Council, and has responded to the U.S. and EU threats in kind by threatening to close a vital artery through which one-fifth of the world’s oil supply is transported.

“Closing the Strait of Hormuz is very easy for Iranian naval forces,” said Rear Adm. Habibollah Sayyari, Iran’s naval commander and the second top Iranian official to make such a threat in 24 hours. His forces were in the midst of ambitious war game exercises in waters near the Strait of Hormuz when Sayyari made the comment.

A spokeswoman for the United States Navy’s Fifth Fleet responded: “Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated.”

The Strait of Hormuz connects the Gulf of Oman to the Persian Gulf, the principal loading point for oil shipped from Saudi Arabia, the world’s largest oil exporter.

While the price of oil popped yesterday immediately following news of Iran’s threat, markets soon cooled and the price of the benchmark crude oil contract on the New York Mercantile Exchange fell for the first time in more than a week, settling at $99.36 on Wednesday, down $1.98.

Still, several investment banks are predicting the price of WTI crude to average about $110 next year while the price of Brent crude, which analysts say affects what most of the world pays for oil, will average about $115 a barrel.

“The possibility that there might be a disruption in oil supply at some time in 2012 as Iran retaliates has, I think, permanently embedded a $10 to $20 premium in the price of oil,” said Bernard Baumohl, chief global economist at the Economic Outlook Group.

“The danger is if oil starts to move toward $130 a barrel, or even higher, depending on whether that confrontation will escalate. Then you’re really talking about the prospect of the U.S. tipping over into recession in addition to Europe, and that the whole global economy will be facing an economic downturn,” said Baumohl.

Furthermore, members of the Organization of the Petroleum Exporting Countries, which includes Iran and Saudi Arabia, have an incentive to keep prices high, as many have spent heavily on social assistance programs in response to the unrest of the Arab Spring and are depending on higher prices to help meet their budgets.

And despite weakening demand in the U.S. and Europe, global demand for oil, especially diesel, is escalating and outstripping supply.

“There’s a consensus view that high prices will persist through 2012 because of the premise that the rest of the world, the emerging economies, are using a lot more fuel,” said Tom Kloza, chief oil analyst at the Oil Price Information Service.

But as production increases in Libya and North America in the coming year, some analysts are predicting prices could fall, especially if the European economy falls apart.

Ultimately, the direction of oil prices remains as uncertain as the global economic outlook. The United States Energy Information Administration this month estimated that the price of WTI crude could fall as low as $49 a barrel or rise as high as $192 a barrel by the end of next year.

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