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Oil prices could spike more than 25%, according to closely followed economist Jim O'Neill

Oil prices could spike more than 25%, according to closely followed economist Jim O'Neill

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by staff ()

Oil prices could spike more than 25%, according to closely followed economist Jim O'Neill

Closely followed economist Jim O'Neill thinks Brent crude oil might surge to $80 a barrel in the next year before falling back to roughly $60 by next November.

That would mark a 26 percent run-up from today's price of about $63.50 a barrel. International benchmark Brent prices have already rallied about $20 a barrel, or more than 40 percent, from the year's lows in June. Brent hit a nearly 2½-year high of $64.65 a barrel earlier this month.

Conventional wisdom holds that prices won't budge much over the next year, says O'Neill, but the former chairman of Goldman Sachs Asset Management and creator of the "BRIC" acronym is not running with the herd.

"While oil prices could be about $60 per barrel in November 2018, my guess is that they will have risen to about $80 per barrel in the meantime," O'Neill wrote in Barron's this weekend.

O'Neill, now an economics professor at the University of Manchester, says the market is finally waking up to the fact that global economic growth is gaining momentum and likely expanding at 4 percent or higher. That means there will be more demand for oil.

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On the supply side, traders are getting nervous about Saudi Arabia, "the world's most important marginal supplier of oil," as the kingdom embarks on "radical changes" to domestic and foreign policy, says O'Neill. Investors are now pricing geopolitical risk into the cost of oil.

Saudi authorities have rounded up officials including princes, ministers and military members as part of an anti-corruption campaign. Saudi Arabia also has taken a more aggressive stance toward regional rival Iran after isolating Gulf neighbor Qatar earlier this year.

O'Neill also believes trends in oil prices bolster the case for $80 Brent crude oil. The five-year forward price for Brent, O'Neill's preferred measure of the market, is on the rise after a period of stability. At the same time, the price of oil for immediate delivery — the so-called spot price — has moved above the five-year forward price.

"With the spot price having now moved above the five-year forward price, one could conclude that a trend change is under way. For my part, I'm unsure, but I wouldn't be surprised if it happened," O'Neill wrote.

To be sure, O'Neill is notoriously wary of oil price forecasts. He acknowledges that his best guess in January 2015 that oil prices would continue to fall turned out to be wrong.