The crude oil squeeze will ease in 2006, TD Bank economists predict.
The headline oil price, currently around $68 US per barrel, could rise to a new high of $75 or $80 US per barrel later this year but is likely to subside to $45 by early 2007, according to a bank study.
Although little cost relief is in prospect this winter for consumers and businesses, it says, prices for gasoline and natural gas should fall along with the crude oil price in 2006 and 2007.
Beyond 2007, TD predicts that oil will rise back above $50 US per barrel, due to "supportive underlying fundamentals - notably, strong crude oil demand from developing markets, limited prospects for supply gains and inadequate refining capacity.'' The report, Crude Oil Squeeze to Ease Next Year: But Era of High Prices Here to Stay, says a significant slowdown in the U.S. economy will be the main factor in the oil price decline.
"A weaker U.S. performance will lead to some slackening in the tight global supply-demand balance for crude oil and refined products, which in turn will ease the massive fear premium currently embedded in prices," said TD economist Derek Burleton.
The report says short-term oil prices are "anybody's guess, especially as investors continue to evaluate the progress in restoring damaged energy infrastructure in the Gulf of Mexico, and the prospect of further hurricane activity."
However, Burleton added: "At the same time, the more oil prices increase in the short run, the more significant the downward adjustment is likely to be over the next 12 to 18 months."
TD Economics expects the annualized growth of the U.S. economy to slow from its current rate of between 3.5 and four per cent to just over two per cent by the second half of 2006.
This "will take a major bite out of the global expansion" and reduce annual growth in global crude oil consumption from more than two per cent now to about one per cent, it says.
"The weaker demand picture will help to greatly alleviate some of the fears that have been instrumental in pushing up prices through the roof this year."
Although "the laws of the oil price cycle are far from being repealed," TD Economics does "see merit behind the hypothesis that the world has entered a new era of high crude oil prices."
The report suggests that "the fundamental price - or the price that can be justified by supply and demand drivers alone over the long run - has probably increased to about $40 US per barrel from the historical level of about $30" in inflation-adjusted terms.