Lehman Bros. Report: Oil Bust in the Cards

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Lehman Bros. Report: Oil Bust in the Cards

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Is $120 oil even real? Not if you ask the Saudis, or even Lehman Bros.

 

The investment bank’s oil expert said this week that the oil boom is due to

bust. Economic growth across the globe will slow just as new refineries kick

in, raising supply.

Recession or not, a U.S. slowdown will slacken demand sharply, right as new

oil hits the market. " Supply is outpacing demand growth,†said Michael

Waldron, Lehman’s oil strategist.

" Inventories have been building since the beginning of the year. We have

pretty significant projects starting soon in Saudi Arabia, and large off-shore

fields in Nigeria,†he said.

Lehman is now predicting prices at $83 a barrel in 2009 and as low as $70 in

2010.

Although some years off, Brazil too has found as much as 8 billion barrels of

light oil and gas offshore. The South American giant’s president says his

country might well join OPEC when the Tupi field begins to pump, in 2011.

In addition, Middle Eastern sovereign wealth funds have pushed up the oil

price by investing billions of their oil gains, ironically, in commodities index

funds.

Now they could be looking to get out, warns Waldron. He figures the money

effect has driven anywhere from $20 to $30 into the barrel price.

In addition, a weak dollar is holding oil prices high, according to a series

of statements from OPEC leaders over the past week.

If you buy the views of OPEC’s various leaders, that’s at least another $20

of oil price that is not supported by the actual supply and demand situation.

 

In addition, Europe’s central bank seems bent on containing inflation there.

A rate increase in Europe is sure to contain the euro’s rise against the

dollar — if serious steps are taken soon.

Couple that with a lower-than-expected rate cut in the U.S. next week, or

perhaps no cut, and the oil price drops as the dollar gains ground.

All this is having little immediate impact now, of course. U.S. gas prices at

the pump hit $3.58 a gallon just as the summer driving season kicks off.

If nothing changes, analysts now expect gas to rise to as high as $4 a gallon

in as little as a month.

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