Discussions on Oil

Verleger Predicts $20 Oil This Year on ‘Devastating’ Crude Glut

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 $65.46 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.
"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.

Oil prices slipped but stayed well above $60 a barrel Thursday after a more positive economic outlook from the U.S. central bank buoyed investor confidence.
Prices were also supported by a larger than expected draw on U.S. crude stocks, implying an uptick in demand.
Benchmark crude for August delivery was down 58 cents to $60.96 a barrel by noon European electronic trading. On Wednesday, the contract added $2.02 to settle at $61.54.
Oil surged Wednesday on signs from the Federal Reserve that the U.S. economy may be performing better than expected.
The Fed said industrial companies cut production far less in June than they had in previous months, and the central bank's minutes from its meeting last month showed it now expects the economy to contract at a slower pace than previously thought.
In addition to such positive economic signals, Vienna's JBC Energy said that "a 2.8 million barrel drop in U.S. crude stocks ... a weakening U.S. dollar and news on strong GDP growth in China provided the basis for a rebound in international oil prices."
The Energy Information Administration said Wednesday that the country's supply of crude oil dropped more than expected last week, falling by 2.8 million barrels.
Inventories have dropped 13.2 million barrels during the last four weeks.
Oil had dropped to $58.78 a barrel last week from $73.38 on June 30 on investor concern that the global economy will emerge from recession slower than expected.
"The degree of short-run panic needed to stay below $60 has to be very considerable," Barclay's Capital said in a weekly energy report. "The situation would have to be weakening to a significant degree. That does not appear to be happening."
Stock investors, inspired by the Fed news and an upbeat outlook from chip maker Intel Corp., sent the Dow Jones industrial average up 3.1 percent on Wednesday.
In other Nymex trading, gasoline and heating oil for August delivery both slipped by nearly 2 cents a gallon to fetch $1.69 and $1.56. Natural gas for August delivery was flat at $3.28 per 1,000 cubic feet.
In London, Brent prices fell 80 cents to $62.29 a barrel on the ICE Futures exchange.

OIL has resistence at $60 and I think in coming weeks it is going trade in the range of $60-$65.

http://groupanlz.blogspot.com/2009/07/market-commentary-july-13-2009.html


Here is our Groups Thoughts on Oil (we discuss equities performance that correlates to oil first then give our oil outlook for the week.