The Case For $80 A Barrel Oil
Daniel Fisher, 05.09.08, 2:37 PM http://www.forbes.com/business/2008/05/09/oil-saudi-arabia-biz-energy-cz_df_0509oil.html
Saudi production is currently a little less than 10 million barrels a day.
The Lehman report contrasts sharply with a Goldman Sachs (nyse: GS – news – people ) prediction earlier this week that crude prices could soar as high as $200 a barrel as non-OPEC producers struggle to maintain output, let alone increase it.
Crude oil hit a record $126 on the NYMEX Friday, almost double the price of a year ago.
Only time will tell who’s right, but the analysts at Lehman make a strong case for falling prices as the markets absorb bearish signs such as the Chinese stockpiling oil in advance of the Olympics, and the estimated 28 million barrels Iran is storing in tankers because it can’t find a market for the heavy, difficult-to-refine crude.
“If those 28 million barrels were in U.S. crude stocks, the market here would be a lot looser,” said James Crandell, an energy markets analyst at Lehman.
A key assumption, however, is that the Saudis will increase production after the election to curry favor with the new president and try to influence policy in the Middle East. While Saudi Arabia guards its oil production and reserves as state secrets, the nation has recently announced three long-awaited oilfields have begun production. Lehman estimates those will add 1.3 million barrels a day of capacity, compared with expected global demand growth of 900,000 barrels a day.
If the Saudis open the spigots, in other words, crude prices would drop, just in time for the desert nation to gain influence over whoever takes residence in the White House.
“There’s a history of output increases, not exactly coinciding with the election but a few months afterwards,” says Crandell.
The Lehman analysts acknowledge they were early in predicting a downturn, having previously set a target of $90 by the second quarter of this year. A busy hurricane season also could keep oil prices high by shutting down production in the increasingly important Gulf of Mexico, the analysts said.
But oil prices are also being lifted by “misperceptions,” they say, including the idea that the weak U.S. dollar has been driving up the price of crude. Historically there has been little correlation between the dollar and oil prices, and while the relationship strengthened last year following the credit crisis, it has since weakened again. The euro has fallen 3.5% against the dollar in recent weeks, for example, yet crude prices have risen a similar amount. Traders “are believing the correlation is going to last forever” when in fact it may already be over, Crandell said.