Oil prices have risen from $33.20/barrel on January 15, to all the way up to the 2009-high of $73.23/b about six months later on June 11. As oil prices continue to rise, price expectations continue to increase.
"Boone Pickens told a standing room audience he expected prices to rise to $85 per barrel by year's end," Philip Verleger said in his widely-read weekly analysis, 'Notes at the Margin.' "OPEC ministers also see higher prices, as does Goldman Sachs. Pessimists are few and far between."
Verleger, however, sees something different. He sees oil falling to as low as $20/b by December 20.
The $20/b claim is one not just to "stand out and be different," but Verleger believes that continuously rising inventories might have something to do with it and points to data released last week by the Energy Information Group.
"[G]lobal supply has been running ahead of global demand since March 2007," Verleger said. "Over the first five months of 2009, supply exceeded demand by 1.7 million barrels per day. The 14-month build in inventories has caused the stock accumulation to approach the peak last record by EIG in 1997."
Verleger believes that the monthly inventory builds have to stop soon because global consumption will increase or global supply will decline.
"My guess is it will be production, not consumption that falls," Vergler notes. "Oil producers will find themselves in the same predicament as natural gas producers today. In the case of gas, output is shut in because there are no buyers."
The economic outlook gives Verleger more incentive to believe that oil prices will drop. Verleger notes that last week Consensus Economics published its June "Consensus Forecast," which contained a survey of forecasts of quarterly growth rates for most major economies.
"The news for those hoping to see oil prices stabilize at current levels is not good. Growth rates for these economies relative to the same quarter in the prior year will be very negative in all countries. Yes, the fall in GDP has stopped. However, activity is much lower than at the same time last year."
Verleger believes that these findings mean that oil use will be much lower in the second half of the year relative to the prior year.
With that in mind, maybe $20/b oil isn't as crazy as it sounds.
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