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Oil to go USD 20??

Financial Post have this article where Philip Verleger predicted that oil would go to $20 dollar.

Demand for oil matters and in deflation consumption is likely to fall. However the other side of the equation is that supply is getting difficult to produce as well. But the world should enjoy this slack driven by the deflation.

Crude oil prices will plunge to $20 US per barrel as the global slowdown throws even burgeoning China into a recession, predicts Philip Verleger of the Haskayne School of Business at the University of Calgary.

Furthermore, he said Tuesday, the downturn will be so deep it will take three to four years for the global economy – and energy prices – to return to normal levels.

“I think we’re going to see a dip in prices just because this economic situation is so terrible,” said the recently appointed David E. Mitchell/EnCana professor in management after speaking during a panel discussion sponsored by the school Tuesday morning.

“I don’t think it stays there (at $20) very long (but) I think it’s going to be some time before it goes back just because of the state of the global economy.”

Crude oil closed down $1.64 at $42.07 US a barrel Tuesday in New York, less than a third of the $147 peak it reached in July, after the U.S. Energy Information Administration said in its monthly energy outlook it expected global oil demand to fall by 50,000 barrels per day in 2008 and 450,000 bpd in 2009 – marking the first time since 1983 that year-to-year world oil demand has dropped.

The lower forecast came as the EIA revised its 2009 world GDP growth estimate to 0.5 per cent, down from last month’s estimate of 1.8 per cent. The EIA estimates 2008 GDP growth will end up at 2.7 per cent.

Panelist Randy Ollenberger, managing director of North American energy equity research for BMO Capital Markets, agreed prices might touch $20 in the very short term but they will quickly rebound as supply costs make uneconomic even sustaining oil and gas plays.

While Verleger emphasized the demand side of the coming business cycle, Ollenberger focused on supply, noting that a survey of 200 oil and gas companies shows the oil price required to allow new oil projects to break even has climbed from about $18 US per barrel in 1999 to $60 in 2007 and an estimated $62 now.

That average price rises to between $80 and $100 per barrel in difficult plays such as the oilsands, he said.

“We may see $20 oil,” said Ollenberger. “My point is we won’t see $20 oil last. We saw $10 oil in 1998; $10 oil didn’t last.

“What made low oil prices last for such a long time in the 1980s was that big inventory of capacity. We don’t have that today,” he said.

BMO is forecasting that the economy won’t get much worse and will start to rebound in the second half of 2009, leading to an oil price forecast of $50 to $60 over the next six months and improving to $70 to $80 in the second half.

“If the economy worsens, I would shift down those near term trading bands by $20,” he said, adding recent declines are due to downside speculation in markets.

Panel member Hal Kvisle, president and chief executive of TransCanada Corp., said the current situation reminds him of 1986, when he was working for Dome Petroleum, and it cost $16 to produce a barrel of oil that was selling for $11.

“People need to recognize that the cost structure will come down,” he said after an audience member asked if Albertans should be worried. “The cost structure for crude oil tends to be whatever the price of crude oil is and if the price is very low, people will select only those very best projects.”

Verleger, an American who served in the Jimmy Carter administration, said oil prices rose after environmental regulation changes in Canada, the U.S. and Europe required lower sulphur content in diesel fuel. That created a shortage of low-sulphur oil, a problem made worse when the U.S. government began adding sweet crude to its strategic reserves. Meanwhile, demand for diesel surged, particularly in Europe, and diesel prices caught up with gasoline.

The recession, he said, is killing demand for oil, down 12 per cent the United States this year, which means inventories are climbing and prices are falling.

“Many people think we’ll see a turnaround in oil markets by next spring. I don’t think so,” Verleger said.

He added the Organization of the Petroleum Exporting Countries may lower its quotas at its next meeting on Dec. 17 to bring the oil price higher but it won’t cut by the five million barrels per day needed to have an affect and it’s very unlikely that its members will curb their output anyway.

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