Strategy

Are Oil Prices Headed for a Fall?

Two analysts strike a contrarian stance and see costs headed down to less than $40 a barrel.
Stephen TaubSeptember 30, 2004

How high will the price of oil go? That’s a critical question for many finance executives are likely to ask as they budget their companies’ costs.

With the cost of crude oil now at about $50 a barrel, almost every day another dire report portends a further surge in prices.

Yet, despite the prevailing negative outlook for oil prices, two major Wall Street analysts who follow the energy industry are apparently not convinced that the long-term direction is up, according to Reuters. Indeed, they’re sticking to their predictions that the price of oil will drop back to under $40 a barrel in 2005,.

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Merrill Lynch’s chief energy strategist Michael Rothman, for example, still forecasts oil prices of around $32.50 a barrel for next year. His reasoning: Buyers are nervously stock-piling supplies for a rainy day.

“The idea is that we’re simply at levels we don’t see being sustainable,” Rothman told Reuters earlier this week. “The underlying story, which is either glossed over or people ignore, is literally the disappearance rate—the amount of oil being produced and not showing up in visible storage.”

Meanwhile, Katherine Spector, a J.P. Morgan global energy strategist, reiterated her forecast calling for an average price of $37.73 a barrel for U.S. benchmark West Texas Intermediate crude oil in 2005. She’s figuring on high production levels, weaker demand, and a mild winter.

“While it’s hard to imagine high $30s when we’re at $50, it wasn’t so hard to imagine the high $30s when we were at $41 just a month or two ago,” Spector said in a conference call, according to Reuters.

More specifically, she figures oil prices won’t start to descend until the second quarter of 2005, as the high-use winter season winds down.

To be sure, the analysts’ forecasts sound optimistic, given the possibility of further disruptions in Iraq, threats that rebels will disrupt oil facilities in Nigeria, and continued growth in demand for oil from China and elsewhere.

Indeed, this week Merrill Lynch hiked the top end of its 30-day price range to $52 a barrel, according to Reuters. And Morgan Stanley’s private- client group is figuring on prices surging to $60, the wire service reported.

On the other hand, Saudi Arabia has promised to hike production. The abundance of tea leaves on the future prospects of oil prices, finally, makes the expense a particularly hard item to estimate.