Big Dilemma for Big Oil

In BP's case, its decision to re-enter Canada might have been a move to shore up long-lasting reserves in an environment in which it feels comfortable. If others continue to confront hostility overseas, they may follow BP's lead and return to the relative safety of the West.

Maxwell also predicts that 2008 could be a tough year for companies in the refining space, not only the integrated oils but also names such as Valero (VLO Quote). Refinery utilization rates were lower than normal for most of 2007, with many facilities undergoing maintenance and repairs.

A number of refineries that were off line this year will likely return next year to provide a greater supply of gasoline and other refined products to the market, and that could pinch crack spreads and hurt profit margins.

Maxwell believes that global demand for oil next year will approach 87 million barrels of oil a day, while supply will only be 86 million barrels. If so, expect the price of oil to be somewhere between $70 and $90 a barrel, Maxwell says.

While these predictions aren't as dire as Boone Pickens' recent forecast of 88 million barrels of daily demand and 85 million barrels of supply next year, they still suggest that the market for crude oil will remain extremely tight, with practically no excess capacity from producers.

Maxwell says that the U.S. economy is likely heading for a recession in early 2008, and that will keep a lid on oil prices. Still, global demand for crude will likely remain strong and supply limited. These factors should prevent crude prices from sliding too far.

Economic Factors

For traders, 2007 was not just the year of $99-a-barrel oil. It was also a year of record volatility in the futures markets. Commodity trader Eric Bolling doesn't just believe that high volatility will persist in 2008, he believes it will increase.

"2008 is a presidential election year. We also haven't seen any major hurricanes in two years, and many traders think that it is time for another big one," he says. "Thus, I think we will see very high volatility in 2008, with both sides being traded. We could easily see oil go as high as $105 a barrel and as low as $75 a barrel."

Bolling also says that crude will continue to trade independently of petroleum product prices.

"Oil has traditionally traded with a high correlation to gasoline," he says. "However, oil and gasoline went their separate ways in 2007." That could continue next year, Bolling says.

Bolling doesn't believe that the U.S. is heading for a recession, but even if the domestic economy slows, growth in China and India will keep demand for oil strong, he says. "The notion that when the U.S. catches a cold the rest of the world catches the flu no longer applies," he says.