Economist sees $20 oil amid 'devastating' glut
In the future lies $200 oil or $20 oil. Take your pick. University of Calgary professor and former U.S. government advisor Philip Verleger says the price of oil will collapse to $20 per barrel this year, as the recession reduces demand far below what OPEC and other oil producers have forecast, Bloomberg News reported Thursday.
"The economic situation is not getting better," Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, told Bloomberg News Wednesday. "Global refinery runs are going to be much lower in the fall. If the recession continues and it's a warm winter, it's going to be devastating." Verleger expects a 100-million-barrel oil surplus by year's end to strain storage capacity and trigger a massive decline in prices.
Global oil inventories continue to rise
Depending on the survey, the oil market is accumulating a 1.0-2.0 million barrel per day (bpd) surplus, as the pronounced global recession, which has reduced demand, and the unwillingness of non-OPEC suppliers to cut production, swell inventories. However, up until now, traders in the oil futures market have looked the other way, keeping oil at the lofty price of about $60 despite the build.
The oil bulls argue that expectations of a recovery in global demand, led by China/Asia, and concern that the U.S.'s monetary/fiscal policies will lead to inflation and/or weaken the dollar, make oil a good investment.
Verleger disagrees, arguing that OPEC does not recognize the severity of light demand conditions. "OPEC don't realize the magnitude of the cuts they need to make," which should include about another 2 million barrels a day, Verleger told Bloomberg News. "Storage is going to become tight. It's not clear if there's going to be enough storage available."
OPEC displays production discipline
Historically, OPEC nations have tend to 'cheat,' or produce more oil than their reduced quota, during times of production cutbacks, in order reap extra revenue from oil sales. That extra oil produced has often proved to be self-defeating, as it has forced oil's price even lower. However, this time, OPEC's production discipline has been good, and a high price, despite the recession, has held. Meanwhile, most non-OPEC producers continue to pump as much oil as their production capacities allow.
Oil last traded at $20 per barrel in February 2002. Oil, which has recovered about 75% in price since hitting an economic cycle low of $35 last winter, traded down $1.05 Thursday to $60.50 per barrel.
Further, while others have predicted a softening of oil prices on a protracted recession, the bulk of the forecasts for the next 1-2 years see substantially higher oil prices.
Goldman Sachs sees $75 per barrel oil by September, The Associated Press reported. And Energy/Oil Billionaire T. Boone Pickens expects a fairly rapid return to sky-high oil, seeing a return to $150 per barrel in three years.
Oil Analysis: The oil bears have continually argued that oil's inventory build justifies a much lower price for oil, particularly when both the U.S. and global economies are in recession. But since 2005, some factor has managed to keep oil lofty - geopolitical risk, oil as an inflation hedge, oil as an asset play, and most recently, the prospect of increased demand during a probable global economic recovery in Q3/Q4. As UCalgary's Verleger correctly points out, oil's supply/demand fundamentals dictate a considerably lower price for oil, but up until now, this has been a market that has largely ignored or been decoupled from fundamentals.
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Reader Comments (Page 1 of 1)
7-16-2009 @ 11:50AM
Iridium said...
THE ONLY THING THAT HAS KEPT OIL ABOVE $20 IS INVESTMENT HEDGES WITH THE MAJORITY OF THE BLAME POINTING TO GOLDMAN SACHS.
I am really tired of arguing the point and I am tired of people trying to justify $60 oil, $147 oil, or $200 oil.
The cost to pull oil from the gorund didn't go up by 200%. The cost of refining oil actually has gone down over the past 20 years. We have surplus capacity and a huge surplus of invetory. Everything points to a price under $20.
Let's see oil last traded below $20 in 2002. Then in 2002 we get a rule change that allows Goldman Sachs and other investment banks to essentially trade oil and speculate on the price without giving any regard to the supply chain. To tade a paper oil contract just like they trade a stock certificate in the equity market. We get single investment houses controlling 70% of the oil contracts in a single day and we end up with the greatest bullshit bubble in the history of the market.
We will have artificially controlled oil until Goldman Sachs is burned to the ground. The government sure isn't going to reinstate the rules governing the commodity markets.
Anyone that says that demand supports the price of oil is a complete moron. Anyone that tries to justify oil above $20 in the current economy is a moron. Oil has been taken over by a different cartel, the investment banking cartel. The most criminal organization in the history of time.
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7-16-2009 @ 1:24PM
ferris said...
totally agree. I have finally got most my friends to see the light. Next is to distroy the traders.
7-16-2009 @ 4:45PM
Jeff said...
You are 100% correct...way to go...the problem is no one cares...they (congress) get too much $$$$ from either oil companies or lobbest (sp). What can the little guy do?
e-mail back. Jeff
7-16-2009 @ 1:23PM
ferris said...
Another supply and demand believer. Are they always going to spin us?
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7-16-2009 @ 1:40PM
sam said...
Say what you want about oil prices, but every year the lifting cost of oil increases and after last year even with declines in services to oil producers after sky high prices have not come down as much as oil. If you let oil prices fall below $40 bbl, within one year the depletion and castrophic effects it will have on oil producers will be irreversable. There needs to be a reasonable floor for oil prices for security purposes national and worldwide, but the traders are the ones that made the wreck by running prices too high and caused the major collapse last fall. This up and down cycle has only gotten worse due to lack of oversight.
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7-16-2009 @ 1:54PM
Doug said...
Gee, it's going down to the level it was when I got my first royalty check in 1992. About time, but never fear the greedy oil companies will not drop gas what it should be at that price. Sucks for all of us.
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7-16-2009 @ 2:17PM
Bob said...
I would think that if you were going to put a comment in you should do your homework......no let's just blame someone. All you have to do is to know that in 1983 oil was $29.00. If you take inflation into account (81.69% approx) you will see that oil,if it just kept up with inflation should be $52.69 per barrel.This does not include the increase in production costs do to the fact the wells are deeper. People need to use thier heads and understand that if prices don't increase but decrease that will cause us to go into deflation. Remember Jimmy ( Im a Dumb***) Carter. Now it's Barack Baby and he will follow in Jimmy's shoe's because his handlers are taking him for a ride and he doesn't even know it.
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7-16-2009 @ 2:40PM
Alan said...
I woner what weed you people are smoking now? $20. oil MY ARSE!!!!!
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7-16-2009 @ 2:51PM
bernie said...
THE ECONOMIES OF THE WORLD ARE BEING
ATTACKED BY ONE COMPANY. GOLDMAN-SACHS
THESE NO GOOD MFKRS WERE RESPONSIBLE
FOR LAST YEARS SPIKE AND THEIR PREDICTIONS
OF OIL GOING TO 200.00 PER BARREL.
THEY ARE GUILITY OF BEING THE MANIPULATORS
WHO RUINED WORLD ECONOMIES...
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7-16-2009 @ 4:08PM
Doug said...
Gee, it's going down to the level it was when I got my first royalty check in 1992. About time, but never fear the greedy oil companies will not drop gas what it should be at that price. Sucks for all of us.
At Present Prices for a barrel, based on the price July 17th last year( $147.27), it should be selling at $1.84 a gallon. Is it? I know the answer is no. This proves my point.
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7-16-2009 @ 4:09PM
Tech said...
Right now oil is being stored in leased tankers and everywhere else hoping demand and the price will rise in the near future. Now the Chinese are importing more but not enough to take up all the slack. The ridiculous price fluctuations ARE the result of traders in the futures market and hype by Goldman Sachs etc. which had $147 oil then drop it to $37! Of course that's not production costs or supply and demand it was manipulated BS and Paulson made billions shorting oil last November on his own account. Now one thing is the dollar is backed by Saudi oil so if the price drops the dollar will rise and gold will sink with other commodites. Possible. Trade using charts and when the trend breaks sell using automatic stops or manual orders and make money with the crooks. America is undergoing a major shift as is the rest of the globalized world but two banking houses are winning, JP Morgan Chase and Goldman Sachs. Simply follow the money to who has benefitted.
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7-17-2009 @ 10:59AM
jd said...
Ah yes the blame game, it's Goldman Sachs! So simple, so easy, find a villan and blame them. Well it is Goldman Sachs but not exclusively, it is certainly oil speculation partly, it is Exxon Mobil, it is OPEC, it is upward pressure caused by demand in China and India, it is Saudi Arabia, it is also a very flawed system that allows the oil industry to do whatever they want whenever they want. It is a series of dererulated antitrust laws that allows companies like Goldman Sachs and Morgan Stanley (who just swallowed Smith Barney) to continue to grow into companies that are "too big to fail" which eliminates any viable competition in the market place.
So the real problem is the control of the oil, which sadly is NOT some commidity like pork bellies or coffee, it is in our world -- a necessity. Half the world population would freeze to death without it, and we would all live in the dark without it. Oil is owned, manipulated, and controlled by the richest people on the planet who have the most to gain by continually adjusting the price for their outrageous bottom line.
Changing a system that is this flawed and this controlled, without viable and reliable alternatives that are not controlled by the same wealthy crooks, is the way forward. But changing how oil is being manipulated right now, by a small group of very wealthy and greedy theives is urgent.
Stop oil specualtion today. It should have never started in the first place. The entire world depends on oil, so it cannot be owned and controlled without a boatload of regulations and limits. Unfortunately the importance of oil to every person on earth has grown to beyond optional dependence, we all rely on it, and presently cannot do without it. Until that changes, oil must be treated as the necessity it has become. Therefore strict regulations must be enacted and enforced.
The days of $11billion dollar profits for one quater should be evidence enough that those wealthy multinational conglomerates have held oil for ransome and stolen money long enough. The middle east's deserts are now dotted with palaces, mansions and whole cities built from oil profit extortion.
Oil can no longer be owned and controlled. It is used by all, so it must be owed by all. The entire world depends upon oil, the world economy also depends upon oil. If we don't learn the lessons that the greedy oil controllers have taught us, then shame on all of us.
Stop blaming and start changing the way we do business. I'd say it's official, deregualtion is a total failure in every business it was applied to. Change the rules NOW.
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7-30-2009 @ 11:48PM
robert said...
when they put the high oil prices up to 147.00 per barroll they so stupid this is why americans stepped in and said ok you bastereds you want to take our hard earned money away from us hell no you ante going to do that to us we will teach your ass that you are messing around with the wrong people here and we taking in control of the oil prices and now you have ono control of it nomore we have control of it now how do you like that ha we will not support your high and rich living days cause them days are over guys and this why this country is in shape it in now cause of people like that so americans contenue to drop your driving habits i know i did and i have saved about close to 1300.oo dollers and that money is in my bank where it belongs not in the hands or pockets of a rich bastered.
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