Verleger Sees $20 Oil This Year on ‘Devastating’ Glut: Cites China Weakness In Part

- “China is in a real desperate situation,” said Verleger, who publishes the Petroleum Economics Monthly. “We’re in a situation where U.S. consumers aren’t consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places.”

Bold call. I can definitely see the "glut" he does, building, too, but $20 is a long way down.

Still, I find solace, as it's only human nature, when others with such credentials (at least on oil, which he has) speaks about the reasons for the massive glut he foretells - a truly, truly terrible and disintegrating economy going forward.


http://www.bloomberg.com/apps/news?pid=20601109&sid=aQBXqFcd5gJo

Verleger Sees $20 Oil This Year on ‘Devastating’ Glut (Update1)
By Grant Smith

July 16 (Bloomberg) -- Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.

A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.

“The economic situation is not getting better,” Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. “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.”

Crude oil last traded at $20 a barrel in February 2002. Futures were at $61.18 today in New York, having recovered 89 percent from a four-year low reached last December. The Organization of Petroleum Exporting Countries is implementing record supply cuts announced last year in response to plunging consumption.

“OPEC don’t realize the magnitude of the cuts they need to make,” which would total about a further 2 million barrels a day, Verleger added. “Storage is going to become tight. It’s not clear if there’s going to be enough storage available.”

China, Inflation

Oil will average $63.91 in the fourth quarter, according to the median of analyst forecasts compiled by Bloomberg. Crude for December delivery traded at $65.61 today in New York. Prices have rebounded on expectations of a demand recovery, led by China and other developing economies, and concern expansionary monetary policy would stoke inflation and weaken the dollar.

At the other end of the spectrum from Verleger, Goldman Sachs Group Inc. predicted in a report yesterday oil will rally to $85 a barrel by the end of the year, and recommended that clients buy futures contracts for delivery in December 2011.

“China is in a real desperate situation,” said Verleger, who publishes the Petroleum Economics Monthly. “We’re in a situation where U.S. consumers aren’t consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places.”

Forward contracts for oil have been higher than prices for immediate delivery this year, a situation known as contango, creating incentives to buy crude now and store it. That may end as growing stockpiles make storage more expensive.

“Prices would be much lower today, but for the very large incentive to build inventories,” Verleger said. “You need forward buyers, which we had when people were fearing inflation, but as concerns turn toward deflation” that will no longer be the case.

To contact the reporters on this story: Grant Smith in London at gsmith52@bloomberg.net
Last Updated: July 16, 2009 07:49 EDT

 

I don't think we will see $20 per barrel in 2009.

 

It's the same as the housing bubble.

Time 0: Analysts speculate that oil prices will be significantly higher next period (due to factors X, Y, Z)

--- Futures prices rise ---

Time 1: People / manufacturers start stock piling resources (why sell now when you can buy now and sell forward in the futures market)

--- Spot prices rise as stockpiling ensues ---

Time 2: Analysts say 'Look at that! Oil prices rose just like forecasted! It must be because of factors X, Y, Z which will surely increase going forward since we already bottomed and I am bullish about the economy'

--- Go back to time 0 ---

---

And when the hot potato finally stops, and the last to hold the oil / futures contracts get burned, the VAST majority of the losses will go to the margin lenders and insurance agencies / derivative holders.

And those guys will just bailed out anyways.

 

This is a wild guess work as good as GS $85 target, so there is also a good chance oil will stay the same range bound between 60s to 70s for the rest of year.

 

Oil will take another dip into the upper 30's lower 40's.

 

So once you fill all these storage tanks, I think oil price will in fact fall from $ 60, I doubt $ 20, but we could see $ 40


http://www.businessinsider.com/china-says-it-isnt-stockpiling-oil-2009-6

Jay Yarow|Jun. 3, 2009, 8:18 AM|6
Print
Tags: Oil, Energy, Commodities, China
China isn't stockpiling any more oil until expanded storage facilities are constructed, according to Zeng Yachuan, deputy director-general of the policies and laws department at the National Energy Administration.

Ultimately, China wants enough oil to hold them for 90-100 days. Currently, the country has storage tanks with oil capacity to last 30 days. Those tanks are filled.

China is planning on building a second set of storage facilities in inland China soon. Those will be underground caverns and storage tanks.In addition to the government's official efforts, Sinochem, a Chinese chemical company, is building its own stockpile of oil.

China is trying to stock up while oil is cheap relative to last year, and relative to future estimates of price.

Since we find it hard to trust China, we wonder if they're saying they're not stockpiling, hoping that will cool off the rising price, while actually purchasing oil at a lower price.

 

I am going to make a bold prediction and I will not be wrong. Oil will continue to trade somewhere between 20 and 200 in 2009. I have 99% confidence in my prediction.

My prediction is as worthy as anyone else in the world, basically useless.

 

Your story is kind old news, June 3rd, anyways, Oil did dip from 73 to 58 during the time being.

Like your saying we can't trust China, which couldn't keep China away from doing what best for China. On the other notes, China will loosen up its tight grip on private sectors exchanging for foreign currencies beginning next month, on August 1st. Let just keep eyes on the price of oil, less forecasting.