Lehman Brothers Report: Oil Bust In The Cards. Options

[Whirlwind]

Friday, April 25, 2008 5:56 p.m. EDT Is $120 oil even real? Not if you ask the Saudis, or even Lehman Bros.

The investment bank’s oil expert said this week that the oil boom is due to bust. Economic growth across the globe will slow just as new refineries kick in, raising supply.

Recession or not, a U.S. slowdown will slacken demand sharply, right as new oil hits the market. "Supply is outpacing demand growth,” said Michael Waldron, Lehman’s oil strategist. "Inventories have been building since the beginning of the year. We have pretty significant projects starting soon in Saudi Arabia, and large off-shore fields in Nigeria,” he said.



Lehman is now predicting prices at $83 a barrel in 2009 and as low as $70 in 2010.

Although some years off, Brazil too has found as much as 8 billion barrels of light oil and gas offshore. The South American giant’s president says his country might well join OPEC when the Tupi field begins to pump, in 2011.

In addition, Middle Eastern sovereign wealth funds have pushed up the oil price by investing billions of their oil gains, ironically, in commodities index funds.

Now they could be looking to get out, warns Waldron. He figures the money effect has driven anywhere from $20 to $30 into the barrel price.

In addition, a weak dollar is holding oil prices high, according to a series of statements from OPEC leaders over the past week.

If you buy the views of OPEC’s various leaders, that’s at least another $20 of oil price that is not supported by the actual supply and demand situation.

In addition, Europe’s central bank seems bent on containing inflation there. A rate increase in Europe is sure to contain the euro’s rise against the dollar — if serious steps are taken soon.

Couple that with a lower-than-expected rate cut in the U.S. next week, or perhaps no cut, and the oil price drops as the dollar gains ground.

All this is having little immediate impact now, of course. U.S. gas prices at the pump hit $3.58 a gallon just as the summer driving season kicks off. If nothing changes, analysts now expect gas to rise to as high as $4 a gallon in as little as a month.

[jackieboy]

How does the Lehman Brothers Report compare to this...



http://www2.nysun.com/article/75363



Get ready for another economic shock of major proportions — a virtual doubling of prices at the gas pump to as much as $10 a gallon.



That's the message from a couple of analytical energy industry trackers, both of whom, based on the surging oil prices, see considerably more pain at the pump than most drivers realize.



Gasoline nationally is in an accelerated upswing, having jumped to $3.58 a gallon from $3.50 in just the past week. In some parts of the country, including New York City and the West Coast, gas is already sporting a price tag above $4 a gallon. There was a pray-in at a Chevron station in San Francisco on Friday led by a minister asking God for cheaper gas, and an Arco gas station in San Mateo, Calif., has already raised its price to a sky-high $4.62.



In Manhattan, at a Mobil gas station at York Avenue and East 61st Street, premium gas is now $4.03 a gallon. Two days ago, it was $3.96. Why such a high price? "Blame the people at STOPEC (he meant OPEC) and the oil companies," an attendant there told me.



These increases are taking place before the all-important summer driving season, signaling even higher prices ahead.



That's also the outlook of the Automobile Association of America. "As long as the price of crude oil stays above $100 a barrel, drivers will be forced to pay more and more at the gas pump," a AAA spokesman, Troy Green, said.



Oil recently hit an all-time high of nearly $120 a barrel, more than double its early 2007 price of about $50 a barrel. It closed Friday at $118.52.



The forecasts calling for a jump to between $7 and $10 a gallon are based on the view that the price of crude is on its way to $200 in two to three years.



Translating this price into dollars and cents at the gas pump, one of our forecasters, the chairman of Houston-based Dune Energy, Alan Gaines, sees gas rising to $7-$8 a gallon. The other, a commodities tracker at Weiss Research in Jupiter, Fla., Sean Brodrick, projects a range of $8 to $10 a gallon.



While $7-$10 a gallon would be ground-breaking in America, these prices would not be trendsetting internationally. For example, European drivers are already shelling out $9 a gallon (which includes a $2-a-gallon tax).



Canadians are also being hit with rising gas prices. They are paying the American-dollar equivalent of $4.92 a gallon, and they're being told to brace themselves for prices above $5.65 a gallon this summer.



Early last year, with a barrel of oil trading in the low $50s and gasoline nationally selling in a range of $2.30 to $2.50 a gallon, Mr. Gaines — in an impressive display of crystal ball gazing — accurately predicted oil was $100-bound and that gasoline would follow suit by reaching $4 a gallon.



His latest prediction of $200 oil is open to question, since it would undoubtedly create considerable global economic distress. Further, just about every energy expert I talk to cautions me to expect a sizable pullback in oil prices, maybe to between $50 and $70 a barrel, especially if there's a global economic slowdown.

While Mr. Gaines thinks there could be a temporary decline in the oil price, he's convinced an overall uptrend is unstoppable. In fact, he thinks his $200 forecast could be conservative, and that perhaps $250 could be reached. His reasoning: a combination of shrinking supply and increasing demand, especially from China, India, and America.



Mr. Brodrick's $200 oil forecast is largely predicated on a combination of pretty flat supply and rip-roaring demand. Other key catalysts include surging demand in China and India, where auto sales are booming, and major supply disruptions in Nigeria and also in Mexico, our second-largest source of oil imports, where oil production has fallen off a cliff.



More factors include the ever-present danger of additional supply disruptions from volatile countries in the Middle East that are not our allies, and the unwillingness of SUV-loving Americans to trim their unquenchable thirst for foreign oil. Likewise, for the first time, emerging markets this year will use more oil than America.



To Mr. Brodrick, it all adds up to an ongoing energy bull market. His favorite plays are the Energy Select Sector SPDR Fund ; United States Natural Gas Fund LP; Apache Corp.; Occidental Petroleum; Anadarko Petroleum, and Schlumberger.



jackie

[Whirlwind]

Posted this piece for contrast. No sense in making $10 gas a self-fulfilling prophecy. You did note the part about speculation adding a big chunk, right? I think alot of this "news" is aimed at having us accept our fate. The crumbling pyramid scheme that is Wall Street has forced those speculators to seek profits as large, in other venues. Like the commodities futures markets. Google share prices didn't hit as close to home as the pump prices have, though. Now the speculation is causing pain we can all easily detect.



Nationalize the oil industry, and be done with it. It's a matter of National Security that we have access to reasonably priced fuel, devoid of speculation's cost.

[jetscott]

how convenient. Just when the bush administration is out of office. I can hear it now. It's just a coincidence.

[jackieboy]

Gosh I like my bicycle more and more!



Now this...




Opec says oil could hit $200
By Carola Hoyos in London

Published: April 28 2008 13:56 | Last updated: April 28 2008 20:03

Opec’s president on Monday warned oil prices could hit $200 a barrel and there would be little the cartel could do to help.

The comments made by Chakib Khelil, Algeria’s energy minister, came as oil prices hit a historic peak close to $120 a barrel, putting further pressure on global economies.

His remarks suggest Algeria wants Opec to continue to resist calls by US and European leaders for the cartel to pump more oil to help ease prices. But Mr Khelil blamed record oil prices on the weak dollar and global political insecurity.

He told El Moudjahid, Algeria’s government newspaper: “I don’t think that an increase in production would help lower prices, because there is a balance between supply and demand and the stocks of gasoline in the United States have recorded a surplus and are at their highest level for five years.”

He added: “The prices are high due to the recession in the United States and the economic crisis, which has touched several countries, a situation that has an effect on the value of the dollar. Each time the dollar falls 1 per cent, the price of the barrel rises by $4 and of course vice versa.”

Some US senators have pinned the blame for high oil prices directly on Opec and Saudi Arabia, its largest and most powerful member.

In a letter to President George W. Bush last week, they said Riyadh had cut its oil production by about 2m barrels a day over the past three years, even though oil prices had continued to rise.

Copyright The Financial Times Limited 2008

[jetscott]

someone tell me who's paying these nuts off that are shooting rockets at tankers and blowing up pipelines. We all know that most people have rocket launchers in their basements

[Artie See]

Obviously all of this is speculation. As with most issues, the truth is somewhere between these extremes.

I agree that one of the biggest issues is the value of the U.S. dollar. Until the U.S. can get its out-of-control Federal budget deficit AND its out-of-control international trade deficit under some semblance of control, the U.S. dollar will continue to be weak.

[cyberscribbler]

I saw where China's consumption of imported oil increase 225% between 1997 and 2004. Also that we spent more (before the Iraq war and $200 bil ago) to maintain a military presence in the Persian Gulf than we benefitted from the troop presence.

How does the saying go, "You go broke trying to gain a larger share of a declining resource"

The future is in higher efficiency particulary Wind & solar, also electric cars, mass transit, motor scooters, bikes, more efficient cars.


This post has been edited by cyberscribbler: Apr 29 2008, 08:08 AM

[Whirlwind]

"the stocks of gasoline in the United States have recorded a surplus and are at their highest level for five years.”



So much for the ridiculous plan that says if we lower consumption, prices will fall, from the supply and demand axiom that is one of the founding myths of capitalism. Consumers cannot exert such an influence.



Speculation in the commodities markets is being partially masked by the dollar's slide. Though simultaneous, they are not cause and effect.