Bull vs. Bear: How high will oil go in 2011?

December 28, 2010, 3:00 PM UTC

The already fragile economic recovery would be vulnerable to rising oil prices. Where will the price of a barrel go in 2011? Analysts argue both sides.

For most of December, prices for crude oil traded at two-year highs on improving equities markets, a weakening US

Dollar and record demand from China. Prices pushed above $90 per barrel on December 7 and reached $91.51 on December 22 – a marked jump from their levels near $70 a barrel in September.

The development is significant. Some economists believe that if prices rise much more, especially past $100, it will likely dampen America’s already slow economic recovery. As the price of crude rises, so does the price of gasoline, and a higher price at the pump will hurt consumer spending overall.

So where will oil go in 2011? Will it surpass the psychologically significant $100 mark at a time when demand for oil from most emerging economies is expected to rise? Or will it retreat as China tries to rein in growth amid worries over inflation?

Here’s a look at the bull and bear arguments for the black gold next year.

Bull: The other side of $100

A growing number of traders and analysts think prices for crude oil will stay relatively high – with some predicting it could top $100 a barrel sometime next year.

A few factors will probably support prices in 2011, according to analysts at JPMorgan Chase (BAC) and Bank of America Merrill Lynch (BAC). The banks forecast that prices could climb past $100 a barrel next year as central bankers pump cash to help accelerate economic growth.

The U.S. Federal Reserve’s recent decision to inject up to $600 billion into the economy through a bond-purchasing program is expected to weaken the U.S. Dollar. The greenback has historically influenced the price of oil and other commodities, including gold and base metals that are mostly priced in the currency. So when the value of the dollar falls typically in tandem with interest rates, that tends to push up the price of commodities, including oil, as investor search for higher returns.

Indeed, the dollar has generally been weakening for some time. It’s anyone’s guess how the value of the greenback might fair next year, especially as the ongoing debt crisis in parts of Europe has put the value of the euro relative to the dollar on a very volatile ride.

Needless to say, growth in emerging markets might also help prices next year — helping reduce stockpiles of crude oil.

Though forecasts at UBS do not predict prices surging anywhere past $100 a barrel, the bank nevertheless characterizes its prediction as “bullish,” forecasting that prices could hover around $80 a barrel next year.

Analysts there say non-OPEC countries and Russia have for years slowed production of crude and supply appears “anemic.” With limited supply and stronger demand coming mostly from emerging economies, prices are poised to stay relatively strong. UBS forecasts demand growing at 1.7% in 2011 as the outlook for the global economy improves.

With the Fed showing no signs of slowing its bond-purchasing program — at least not yet — and growing demand from emerging economies, it seems plausible that oil prices will climb higher.

Bear: A brief jump explained

But not everyone is so bullish. Despite talk that crude could shoot as high as $100 a barrel, Phillip Verleger of PKVerleger LLC, a Colorado-based economic consulting firm on energy and commodities, doesn’t buy the hype.

Verleger forecasts that prices could fall as low as around $75 a barrel in 2011 and says the recent spike in crude above $90 can be explained more by isolated and unforeseen factors than pure laws of consumer demand and supply.

For one, the East Coast in particular felt prices surge after a refinery in Canada’s Nova Scotia area, which produces much of the region’s supply, was shut down this fall, which helped reduce supply at a time when demand for heating oil rose.

What’s more, demand for oil surged in China as authorities shut down power generation to reach 2010 emissions targets and consumers were forced to rely more on diesel generators.

“It’s hard to see how the market could sustain $100 a barrel,” says Verleger, adding that China’s demand for oil could be curtailed in 2011 as government officials continue to control growth amid concerns over rapidly rising prices.

Also on Fortune.com:

Patricia Yarrington’s energy fix

Bob Stoffel’s UPS green dream

Shell: We’ll produce more gas than oil by 2012