The Price of Oil Will Surely … Fall ??!?!

I came across a fascinating article from Forbes Magazine (14 August 2006).  It is an opinion written by the owner of a consulting firm.  It is scary how much sense it makes; I am not sure if it is a pipe dream just yet.  Furthermore, I am not completely sure that it would be a good thing, given the other not-so-nice predictions that go with a falling price for oil (too far, that is).  I have given a few excepts of the article here:

Speculation … jumped from stocks to real estate, emerging markets and commodities. Oil in particular. Investors … have bought oil for delivery many months hence in the futures market, pushing those prices above spot levels. … The futures price for December 2006 is now $4 a barrel higher than the price for immediate delivery.
       … now oil producers can lock in a profit by selling future production (or selling what they now hold in iinventory) in the futures market. They have become hoarders. … The surges in crude inventories started in 2004 when the leap in prices commenced. Inventories are now back to the peak levels of 1998, just before oil prices collapsed to $11 a barrel in December of that year from $18 in December 1997. Abroad, there’s talk that Iran has chartered 20 huge tankers to store excess oil that would total 40 million barrels, or half a day’s global demand. That’s a lot. … Futures contract holders are very vulnerable. Prices have to rise $4 per barrel between now and Nov. 17, when the December contract expires, just for owners of December crude oil futures to break even, more for them to make money. It will take a lot more
Mideast turmoil for that to happen. 

What’s clear is that the oil price spiral will end. [And when] Speculators … bail out …distant futures prices will collapse. That in turn will kill the desire to hold inventories. … Producers and refiners will dump inventories on the market. Crude oil price declines of $30 to $40 per barrel from the current $75 can be expected. True, that would carry them below equilibrium levels, but markets overshoot on the downside just as the oil market has done on the upside.

Oil prices held up relatively well in the mid-May through mid-June recession-anticipating debacle in gold, base metals, emerging markets and other speculative areas. In the face of high inventories, they won’t keep doing that for much longer.                                                                                                
A. Gary Shilling is president of A. Gary Shilling & Co., economic consultants and investment advisers. Visit his homepage at www.forbes.com/shilling.                           
 

I guess we’ll see what happens! 

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Published in: on August 4, 2006 at 3:50 am  Leave a Comment  

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