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November 2008

Vol. 13, No. 47 Week of November 23, 2008

Open season for oil gurus

Economists: Oil prices larger factor than subprime collapse in economic meltdown

Gary Park

For Petroleum News

Two months after dangling the prospect of US$200 oil, Canadian economist Jeff Rubin found some company on his often-lonely maverick perch.

He was joined earlier in November by the International Energy Agency, which said $200 was a realistic target by 2030 — 18 years ahead of Rubin’s forecast, but still affirmation of what now seems a lofty goal.

When it comes to the immediate term, Rubin takes a more tempered outlook.

The CIBC World Markets chief economist and noted energy bull predicts there will be no more “systemic shocks” in stock markets this year and that oil shares will outperform other sectors when the recession ends in Canada in the early part of 2009, with oil rising to US$100 in the second half.

He forecasts that the Toronto Stock Exchange-Standard & Poor’s composite index will edge up from about 9,000 currently to 9,500 by year’s end and 12,000 by the end of 2009.

Role of rising oil prices

Along with fellow CIBC economist Peter Buchanan, Rubin argues that surging world oil prices may have been a larger factor in the global economic meltdown than the financial impacts of the U.S. sub-prime mortgage collapse.

“Four of the last five global recessions were caused by huge spikes in oil prices,” they said. “And the world economy is coming off the mother of all spikes.”

The CIBC report said that past oil shocks triggered global recessions by transferring billions of dollars — in fact, trillions of dollars in the latest round — of income from economies with typically very low savings rates to economies with typically very high savings rates, effectively removing much of that money from circulation and reducing demand globally.

“While many of those petro dollars get recycled back into the financial assets of (industrial) countries, many of them never get spent,” Rubin said.

“Those same transfers are occurring now and at recent triple-digit oil prices, they are occurring on an even more colossal scale than ever before,” he said, observing that the annual cost of U.S. oil imports has grown by US$200 billion since 2005.

“The good news is that if triple-digit oil prices were the real culprit (current oil prices represent) a path to recovery,” Rubin said.

Groppe at odds with Rubin

So, what’s the betting among the other gurus?

• Henry Groppe, an 82-year-old with more than half a century of accurate forecasts to back his projections, stuck to his guns almost a year ago when oil was closing in on US$100 and then nudging US$150. At that time he bet on US$60 before the end of 2008.

The quiet-spoken Texan, who eats brown rice and tofu, told the Globe and Mail earlier in November that “essentially, all forecasting, no matter what’s being forecast, is a straight-line extrapolation of what has been experienced very recently. All of our work is aimed at forecasting changes of direction and discontinuity, because that is the reality of the world. For the last several decades, our forecasts are nearly always in contrast with the consensus.”

Groppe fundamentally believes that global oil production has peaked and is destined to start a slow, steady decline — putting him at odds with Rubin.

Emphatic that he is right, and that price trends will result in demand destruction as power generators and major industrial consumers shift to cheaper fuels such as coal and natural gas while retooling their equipment to lower consumption, Groppe expects that oil will rise slowly to about US$100, which will “provide the necessary reduction in consumption.”

He says the forward strip in oil futures has been the “poorest forecaster of oil prices of anything that anybody has ever thought of using.”

“As long as people are driving prices lower based on those forward-strip commodity price assumptions it presents the investment opportunity of a lifetime,” he said.

Some OPEC members struggling

• Kevin Norrish, an analyst at Barclays Capital in London, says the lower oil prices fall the “further out of equilibrium the market is headed.”

“How low prices go is rather random — $50, $40, $35? It could be any one of those numbers,” he said.

• David Dugdale, an energy analyst at MFC Global Investment Management, suggests future production could be curtailed if prices slide much below US$50 because so many oil fields cost more than that to develop.

There will be some cuts in at least discretionary spending if the US$50 barrier topples, he said.

• Rob Laughlin, an analyst at brokers MF Global, said some OPEC member countries are already struggling to make money at current prices, especially Iran and Venezuela, where costs are relatively high.

• London-based Bernstein Research said the marginal cost of bringing new projects on stream is about US$75-$80 per barrel, which prompts observers such as Robert Skinner, a former director of the International Energy Agency, to caution that the big challenge for producers will be to ramp up output when the financial crisis passes.

“I don’t know where the world oil price is going because the volatility is 10 percent; you’re seeing changes of US$5 a day,” Skinner said.





EIA cites stagnation, cuts oil price forecast

In October the 2009 West Texas intermediate crude oil price was projected to average $112 a barrel — in November that number was dropped to $63.50, just above half of the October projection.

That’s how much the world changed in a few weeks in the view of the U.S. Department of Energy’s Energy Information Administration.

EIA said its November price projection is based on “world-wide economic stagnation,” which the agency expects will keep oil markets weak through next year.

Prices are expected to average $101 per barrel this year, EIA said Nov. 12 in its short-term energy outlook. “Under the current economic assumptions and assuming no major crude oil supply disruptions, WTI prices are expected to average $63.50 per barrel in 2009,” the agency said, down from its $112-per-barrel October forecast for next year.

EIA blamed a drop in demand: “The current U.S. and global economic downturn has led to a decrease in global energy demand and a rapid and substantial reduction in crude oil and other energy prices. As a result, projections for both energy demand and prices are considerably lower than last month’s ‘Outlook,’” the agency said. “Further deterioration in actual or expected global economic growth as a fallout of the current financial crisis may lead to even lower prices.”

EIA said world real gross domestic product growth, which was 4 percent in 2006 and 2007, is expected to slow to some 2.5 percent this year and to only 1.8 percent next year; this compares to an October forecast of 3 percent growth for this year and 2.8 percent for 2009. The agency said previous lows for world economic growth were 0.3 percent (1982), 1.7 percent (1993) and 1.5 percent (2001).

In the U.S., real GDP has been lowered to 1.3 percent growth for this year (from 1.8 percent in October) and “is projected to decline by 1.4 percent in 2009” (compared to 0.8 percent growth projected in October).

Slowing global economic growth — and high prices in the first half of this year — have “caused oil demand growth to slow dramatically,” EIA said.

The Organization of Petroleum Exporting Countries has reduced target production and EIA said price levels “will primarily depend on the magnitude and duration of the economic downturn as well as OPEC and non-OPEC behavior.” The agency’s price projection “assumes that the OPEC production cut may limit, but not reverse, the recent sharp fall in oil prices.”

Prices are expected to remain relatively flat, averaging $60 to $65 per barrel in 2009. “The condition of the global economy is expected to remain the most important factor driving world oil prices,” EIA said.

Natural gas also affected

EIA said the economic downturn “is also lowering current and expected natural gas prices.” The agency projects the Henry Hub natural gas spot price to average $9.27 per thousand cubic feet this year, and drop to $6.82 per mcf next year. In October EIA projected that the Henry Hub would average $8.17 per mcf next year.

The average Henry Hub spot price in October was $6.94 per mcf, 94 cents an mcf below the September average.

The “dramatic shift in expectations for natural gas prices” is driven by the slowing economy, continued growth in natural gas production and the decline in oil prices, the agency said.

“Beyond the winter, the weak economy and continued growth in onshore natural gas production are expected to keep prices relatively low.”

—Petroleum News


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