Crudomania Is Over

 |  Includes: BP, DBO, OGZPY, OIL, USO
by: Bob van der Valk


First things first, and I will answer that by officially declaring: "It's over and thank goodness for that!" Now crude oil prices will be allowed to float between $40 and $75 per barrel in 2009 depending on the pace for the recovery of the world and U.S. economies.

Just like what happened in Holland in the 1600's with the price of tulip bulbs, the crude oil bubble has burst. Tulip mania was a period in the Dutch Golden Age during which contract prices for tulip bulbs reached extraordinarily high levels and then suddenly collapsed. It is generally considered the first recorded speculative bubble on a product to be rare and in short supply.

A similar collapse happened to crude oil in the last four months of 2008 and it took a huge financial toll on the petroleum industry, mainly with the independent refiners taking the biggest hit. The vertically integrated major oil companies will be surviving since they have their oil reserves safely tucked away in the ground at less than $30 per barrel.

The investors involved in the speculation are still licking their wounds. But they are not about to take any more calls from their stockbrokers expounding the virtues of putting their monies into a no brainer commodity like crude oil.

However fossil fuels, for running our automobiles and industry, will be here to stay for the immediate future. We are about to see a change on that front as well with the new administration taking over on January 20, 2009. Their priority on setting goals will be for the U.S. to become energy independent by going "green" within 10 years.

The petroleum market must feel like Oliver Hardy, who said to Stan Laurel on many occasions: "Well, here's another nice mess you've gotten me into!" They then proceed to do the same things that got them into trouble all over again but we excuse them because they are making us laugh. Nobody is laughing now, but the petroleum industry does have a habit of repeating the same mistakes they made in the past.

So will the petroleum industry repeat itself and allow the speculators and investment bankers to rule their roost in 2009?

If the past two years have taught us any lesson it is that the energy analysts at the various investment banks should not be relied upon to give unbiased advice and make accurate crude oil price predictions.

Who can forget the forecast made in August 2008 by Goldman Sachs equity analyst Arjun Murti predicting that crude oil prices would spike to $150-$200 per barrel before the end of 2009 due to the increase in demand and shortage of supply? Now their commodities team led by Jeffrey Currie has adjusted that price to just $45 per barrel for 2009.

Stephen Roach, chief economist at Morgan Stanley, predicts the price for crude oil to average $82 per barrel in 2009. That is the highest price being forecasted by any of the investment firms.

The Bloomberg Consensus came up with the forecast that oil futures may rebound from their worst year to average $60 a barrel this year. That forecast is based on the median of 33 analysts compiled by Bloomberg.

But crude oil forecasting is like trying to drive a car blindfolded.

Crude oil prices went from $30 per barrel in November 1999 all the way to $147 per barrel in July 2008.

This year, world crude oil prices will likely continue to be influenced by the fear of oil supply interruptions that may come from political or economic pressures, perhaps moreso than actual supply and demand.

The OPEC cartel seems to now have lost its clout after crude oil prices continued to drop in the last quarter of 2008 despite two sizable cuts in production.

The current strife in the Middle East, with Israel's invasion of the Gaza Strip, has sent shudders throughout the crude oil trading world. With the possible Iranian involvement in that conflict they may choose to once again cut off crude oil shipments to any country supporting Israel.

In addition, Gazprom (OTCPK:OGZPY), Russia's state owned oil company, stopped shipments of natural gas to the Ukraine. This has caused pressure to dwindle in the pipeline system that crosses the Ukraine and in turn is creating delivery problems of natural to Western European countries.

BP's former CEO, John Browne, made an attempt in November 2004 to calm the world concerning the then impending oil crisis. He confirmed that crude oil prices will stay very changeable and said:

It is not helpful for the world to believe that it is running out of oil. We are evidently not. If demand returned to historic levels the supply-demand proportion would be back to more normal levels by 2008.

He further acknowledged that if demand continued to grow at the same exceptional level as it had in 2004, the world would run out of spare capacity, but he added:

I think that would be a bit of a stretch in my view, since oil is not immune from the general vagaries of the world economic situation. In the medium term BP expects the oil price to stay above $30 a barrel underpinned by OPEC discipline and their needs for revenue.

Sir John Browne was later interviewed on CBS's "60 Minutes" show that month and reiterated the above statement. He further elaborated that he based his estimate, that crude oil would stay above $30 a barrel, on the fact that BP was drilling for crude oil in the deep waters of the Gulf of Mexico and had calculated that they could bring oil up from those depths at that price.

Will crudomania be continuing into 2009 now that we have been given warning that consumers will cut back on their usage of fuel when prices get out of line?

A current Gallup poll indicated that over 50% of the U.S. public has permanently changed their driving habits even though the price of gasoline was less in the 2008 period when compared to like period in 2007.

The long term answer, under normal market conditions, would have to be that we will not see crude oil at anywhere near the lofty prices obtained in 2008.

Disclosure: I hold no positions in any of companies or commodities mentioned in my article.