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| Oil Contrarian Sees Bubble Ready to Burst |
| 2005-04-05 |
| Most energy analysts on Wall Street expect oil prices to remain high for the foreseeable future because of strong demand and limited supply. Then there is Tim Evans, a contrarian who says today's crude oil prices above $50 a barrel reflect nothing more than a market bubble fed by speculation and unwarranted fear. Evans, a senior analyst at IFR Energy Services in New York, believes oil prices could plummet to $28 a barrel as early as this summer. "I guess that makes me the lunatic fringe," Evans said, followed up by a burst of laughter. Evans' basic message is that the world's oil supply is sufficient to meet demand, that motorists will soon show that they're not willing to pay any price for gasoline and that the market is unreasonably receptive to worst-case-scenario thinking. The 45-year-old analyst, who earned his bachelor's degree in mineral economics from Pennsylvania State University, has led energy research at IFR, a division of Thomson Financial, for the past 10 years, following stints as a copper trader and an analyst at a mining concern. Evans writes a twice-daily technical analysis of the petroleum markets that costs $395 a month and is read by institutional investors, major oil companies, fuel distributors, traders and journalists. Oil prices began rising above historical norms a few months before the U.S. invaded Iraq and have maintained their upward momentum since then due to rising demand, a shrinking supply cushion and market worries about everything from a hurricane in the Gulf of Mexico to pipeline sabotage in Iraq. The declining value of the dollar and increased hedge fund activity on futures markets have magnified the runup. Rapid economic growth has largely masked the negative impact of high oil prices in the U.S., analysts say, though the airline industry has been stung, as have low-income families and those living on fixed incomes. Gasoline demand is about 2 percent higher than a year ago in spite of pump prices averaging $2.15 a gallon. Veteran oil market analyst Peter Beutel of Cameron Hanover Inc. said Evans' outlook is not as crazy as his willingness to publicly stick out his neck. "I don't disagree oil prices are going to drop precipitously at some point," Beutel said. "But, boy oh boy, they tell analysts to pick a time or pick a price, but don't do both. I certainly honor his bravery." When pressed to do just that, Beutel said he could envision $28 a barrel, too - in 2008. Most oil analysts have steadily raised their oil price forecasts over the past two years, keeping themselves in sync with the market's upward momentum. They back up their upward revisions with data pointing to a limited global supply cushion at a time of rising demand, particularly in the United States and China. They also cite the declining value of the dollar and they voice fears about possible supply disruptions all around the world: from labor strife in Nigeria to refinery snags in America. Goldman Sachs analyst Arjun Murti last week raised his forecast for 2005 from $41 a barrel to $50 a barrel. The report said the market may be in the early stage of a "super spike" that sends prices as high as $105 a barrel - the price Goldman Sachs said may be necessary to significantly curb energy consumption. The report has contributed to a recent rise in crude futures on the New York Mercantile Exchange, where oil for May delivery settled Monday at $57.01 a barrel. Nymex futures closed at a record $57.27 a barrel on Friday. Evans scoffed at the Goldman Sachs report, saying "the probability of reaching that price level is so small it's, like, laughable." "Yes, $105 could happen. Texas could slide into the Gulf of Mexico. There could be a nuclear war with Iran. But you know that in a scenario like that I somehow don't think the world economy is going to be screaming for more oil." Evans is not the only contrarian - there are still a handful of analysts forecasting prices below $40 a barrel in the second half of the year - but he may be the most blunt voice of opposition to the bullish market consensus. He sums up the group-think this way: "Greed makes you stupid." Some of Evans' main arguments are as follows: - There is no worrisome lack of supply. With 1.8 million barrels a day of excess production capacity, Saudi Arabia can quickly pump enough oil to offset any disruptions, short of the most catastrophic scenarios. "Oil prices have been rising for the last 18 months on hypothetical supply disruptions," Evans said. "Every time we come up with a new 'what if?', the oil price manages to go $5 higher." - Higher prices will eventually cause gasoline demand, which is now about 2 percent higher than a year ago, to taper off. And higher prices will lead producers, including Saudi Arabia, to pump more oil. - The U.S. Strategic Petroleum Reserve, which the Bush administration has been filling at an average rate of nearly 250,000 barrels a day, is nearly full. By August, the market should have that much more supply of light, sweet crude available to it. All of these factors have been ignored, Evans said, by the growing number of hedge funds and other speculators betting on crude futures, proving only that there is demand at any price for "paper barrels." When asked why the market would ignore what he considers to be an adequate supply situation and instead focus on everything that could wrong to disrupt it, Evans answered with a question. "Why did people chase Internet stocks in the late 1990s, and why did they shift from looking at earnings to looking at revenues and from looking at revenues to looking at the number of hits on a Web site as a method of valuation?" |
| Posted by:Mark Espinola |
| #19 Jimbo--Dammit, man! The strategic reserve is for a national emergency! If Iran and Israel decide to go nuclear, or China invades Taiwan and starts sinking tankers in the Indian and Pacific Oceans, or the "super-volcano" under Yellowstone blows, or a large meteorite hits the Earth, etc., we're gonna need something to live on for a while! Thank you, Slick Willie, for dipping into it and sticking the next prez with the trouble of re-filling it. Of course, you got your second term and your blow jobs, so what do you care? |
| Posted by: Dar 2005-04-05 9:21:11 PM |
| #18 Don't confuse the cost of oil and the cost of gasoline. Until somebody starts building a heap o' refineries, the supply of oil is not directly related to the supply of gasoline. Especially if you're counting on that nasty stuff the Saudis call oil these days. |
| Posted by: Chuck Simmins 2005-04-05 9:02:43 PM |
| #17 "Anyone who thinks the government can buy low and sell high in an open market is a fool." I dunno. After all, California was very successful in its takeover of the electricity market in 2001, boosting the presidential aspirations of Governor Dav... Oh, right. |
| Posted by: jackal 2005-04-05 8:47:06 PM |
| #16 This guy may have a valid point if one checks the great oil price dip of 1999. |
| Posted by: Mark Espinola 2005-04-05 7:38:59 PM |
| #15 Anyone who thinks the government can buy low and sell high in an open market is a fool. Any increase in uncertainty merely increases the risk premium i.e. the price. What the government can do is reduce the risk of high cost producers who can produce at less than the current market price by commiting to buy from those high cost sources at a fixed price on long term contracts. |
| Posted by: phil_b 2005-04-05 6:04:54 PM |
| #14 Oh and buy Gold, keep a good food supply handy and whine. |
| Posted by: The Militia Needs You 2005-04-05 5:44:01 PM |
| #13 LOL the Martian equatorial fields will soon drive down the price of oil to 11teen cents a quart. Jesus! Let the President set the price at negative numbers! LOL! NitWits. |
| Posted by: Shipman 2005-04-05 5:41:37 PM |
| #12 Basically the Pres could set the upper price of oil if he wanted to. Complete and total BS. Clinton's stunt with the strategic reserve had essentially no impact on oil prices or the price of gasoline, it was clearly a pure political play. There's little reason to believe that another round of the same would fare any better, even a massive drawdown is unlikely to have more than a minimal transient effect (analysts say a moderate drawdown would reduce gasoline prices by no more than a few cents per gallon). I think you're grossly overestimating the size of the US strategic reserve. Any drawdown large enough to have a noticeable impact on crude prices can last no more than a few weeks. After that you've got to start refilling the reserve and you'll drive the price right back up. If you really want to see prices impacted try declaring high oil prices a national security matter and using that hammer to open every square inch of the nation to exploration while simultaneously exempting oil producers from environmental regulation and associated litigation. |
| Posted by: AzCat 2005-04-05 5:36:57 PM |
| #11 Baloney. If you start selling a little bit a day you will get money for it. and it will be more then you paid for it on average. they are not there to hit back economically? why? because we have never used them like that before? And no it would not take long to invade and seize another countries oil supplies if you truely wanted to. you would just have to be brutal about it. But again Saudi oil fields are isolated, meaning no way to sabotage them unless you plan on walking across the desert witout being seen. Point is the reserve is useless if you never use it. If the price goes up too high, it makes no sense to buy, sell for a while. Make some dough. then buy again when the price is more to your liking. In the short term there is nothing anyone can do to offset you. Opec cant cut production everytime you sell oil. Basically the Pres could set the upper price of oil if he wanted to. No need to invade anyone, just sell into the price hikes. This alone make people less twitchy about speculating oil prices way up. Because you can bet money someone is making a ton of cash controlling it all. Throw in some chaos buy making it impossible to know when the US will start selling. |
| Posted by: Jimbo19 2005-04-05 3:49:38 PM |
| #10 gotta disagree, Jimbo. If you sell the oil, you aren't guaranteed to get what you paid for it - you will, as you note, depress the price. Buy again and the price goes up while you do so. The reserves aren't there to hit back economically. Do you have any idea how long it would take to invade Venezuela and Mexico even if we wanted to and could justify that? And how much sabotage could shut down their production? And how long it will be before ANWR and other fields are brought online? The bloody reserve is there to be used if necessary - and I don't mean for your summer vacation or my own. |
| Posted by: snarfles smooch2349 2005-04-05 2:59:37 PM |
| #9 bleh. this is stupid. Bush and Cheney are oil men, wtf are they doing buying high? sell the dang reserve and lower prices. They could do it easily. They start dumping oil and puttiing that money towards the deficit, and oil prices will fall. When they fall enough, buy more. After a while the idiot speculators will have been buned for billions, and cashed out. We do not need a huge reserve anymore. Fill it when oil is cheap, sell it when the arabs get uppity. This will cause the Arabs no end of pain. Why do you need a big reserve? If you never use it to hit back economically then what good is it? Dont give some cold war scenario crapola. In a war situation you all know dang well we could seize venezuela and Mexicos oil supplies overnight, heck Saudi oil fields would be easier. |
| Posted by: Jimbo19 2005-04-05 2:51:59 PM |
| #8 Yep, the land of six hundred thousand dollar bungalows and four hundred thousand dollar condominiums. |
| Posted by: Bomb-a-rama 2005-04-05 2:40:42 PM |
| #7 BAR - you must live in Collee-fornia. ;-p |
| Posted by: Barbara Skolaut 2005-04-05 1:16:18 PM |
| #6 Now if only the housing bubble here would burst.... |
| Posted by: Bomb-a-rama 2005-04-05 11:03:01 AM |
| #5 - The U.S. Strategic Petroleum Reserve, which the Bush administration has been filling at an average rate of nearly 250,000 barrels a day, is nearly full. Thank God--I was so damn sick of Clinton using this for his short-term political gain! Of course, everything was expendable or for sale during his administration if it could give him an assist--strategic oil reserve, nuclear missile technology, Lincoln's bedroom... |
| Posted by: Dar 2005-04-05 10:26:58 AM |
| #4 Oil will go to $28 pb. Its what happens between then and now thats of interest. |
| Posted by: phil_b 2005-04-05 9:45:52 AM |
| #3 ANWR now |
| Posted by: Frank G 2005-04-05 9:16:23 AM |
| #2 Burst baby burst! |
| Posted by: sea cruise 2005-04-05 9:02:26 AM |
| #1 ... oil prices could plummet to $28 a barrel .... Regardless of the accuracy of the prediction this is a key statement. He seems to be talking about $28/bbl oil as a floor whereas a few years ago my folks were receiving approximately half that amount as the market price for their production. Given demand growth I can easily imagine another doubling of the floor by the end of the decade or just after, it's only a matter of time. |
| Posted by: AzCat 2005-04-05 8:43:13 AM |