Sunday, October 12, 2008

Oil prices could fall to $60 a barrel or lower

Under the global economic slowdown, experts predicted oil prices could fall to $60 a barrel, or lower with gas prices soon to follow.

As the world loses confidence in the foundations of its economic system, Deutsche Bank used yard sticks to argue that crude is currently way too expensive and may fall to the $60 a barrel range as the economy worsens. It expects GDP growth to slow by 1.5% over the next few years and scenario could get even worse.

"Indeed if one examines the banking sector crises in Japan and Sweden, economic output declined for at least two years following the crisis," Adam Sieminski, the bank's chief energy economist, wrote in a research note. If the global economy slows to less than 2% growth a year, "oil prices could spiral down, much like they escalated in 2007."

An oil analyst at Cameron Hanover, Peter Beutel sees a 2009 low of around $50 or $60 a barrel, then even lower prices in 2010.

"As night follows day, low oil prices have always followed high prices, and the decline has always been swifter than the advance," said Peter Beutel.

"I'm not going to rule out some extraordinarily low numbers, even $20 a barrel," he said, acknowledging that five months ago many respectable analysts though we'd never go below $100. "Whatever the market does, it's going to make us all look like fools."

Deutsche Bank concluded that "crude oil is the most richly priced commodity currently." Crude’s historic price average of $35 a barrel, it's currently 100% higher, higher than any other commodity. Oil prices would have to fall to about $45 a barrel to return crude to its historical average.

The bank also calculated how high oil prices have to be for OPEC countries to maintain their budgets. Iran and Venezuela, often the first to call for production cuts, need $95 per barrel. Russia needs about $70, while Saudi Arabia, OPEC's largest producer and de facto ruler, needs about $55 a barrel.

The bank estimates crude needs to cost $80 a barrel to keep new production coming online and $60 a barrel seems like a probable place for oil prices to bottom out.


Michael Ejercito said...

Twenty dollars a barrel is deep into reverse-bubble territory.

Anonymous said...

USD 20 is too low

Anonymous said...

with the emerging of alternative energy for car, the demand for oil will be greatly reduce. USD 20 is justified.