Crude Contrarian To the Extreme: Philip Verleger's At It Again

Late last week, several news articles quoted vaunted energy analyst Philip Verleger as predicting drastically low oil prices in the near future. "It's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily," he said in the Seattle Times and other papers.

Verleger, who gained renown for his prescient, ahead of the pack call of $70-a-barrel way back in August of 2004 (when the country was feeling sorry for itself at $48), has made a bold move by forecasting such ultra-cheap oil prices on a day when futures still hover around $70. But if he turns out to be right, and you've been a die-hard Verleger disciple ever since his 2004 prophecy made headlines, you might be a little upset at his recent drastic turnaround. Why? On July 24th of this year, Verleger appeared in a Bloomberg article in which he concurred with fellow analysts that crude would soon hit 100 bucks. "Commodity investors looking for $100 oil will see it," he stated.

So, If we have indeed seen crude oil's peak for the next few years, anyone who bought in at the $75 level from when that quote was published will have been better off had they invested in Tom Cruise(maybe). With his $15 call today, it seems possible that Verleger's strategy might be to choose a dramatic landmark far in the direction of whichever horizon the market appears headed toward.

Comments

[Sidney Will...:]

I suppose that it is possible that pigs can fly. I would love to see $15 oil again. Would also like to see my deceased grandfather. Here's hoping for the best.

2006 Sep 17 08:42 PM

[The Kennel:]

We have been debating Verleger's reverse spike prediction for the past several days over at The Kennel (where we are heaily invested in energy). The general consensus is that we would like to know what he's been smoking. However, to give the devil his due, your piece does not come close to doing justice to his argument.

Verleger's main point is that while the supply/demand curves point inevitably to higher prices on a strategic level, that tactically prices are extremely volatile, partly because of on-again, off-again geo-political factors and partly because of the influence of speculators such as hedge funds who are drawn to the "action" on the energy front. Combine a Kohoutek-like hurricane season, a NATO-force in Lebanon to cool down that flash point, and the prospect of successful negotiations with Iran on their nuclear program with extremely high inventory levels (we are approaching circa-1990 record highs), and it might be enough to chase the hot money out of energy in general, and oil futures in particular. If that were to happen, prices would fall hard and fast. Exactly how hard and how fast is anyone's guess, but once one of these momentum balls gets rolling, it is certainly feasible that the price could temporarily fall below sustainable levels.

The takeaway from Verleger's analysis is not that we could go back to $15 oil for the next five years, but that conditions are present the could result in a vicious reverse spike. If that happens, those with cash to buy in near the bottom will be happy campers.


Brad Hessel, Manager
The Kennel

2006 Sep 18 09:31 AM