While oil is a finite resource, focusing on the long term can blind one to near-term dynamics. There has been surprisingly little mention in the mainstream media of how large the current oil surplus is. The collective view seems to be that this will take care of itself in short order. But that may be longer in coming than most believe.
Some veteran oil analysts, in particular Philip Verlerger, beg to differ. From the Los Angeles Times (hat tip reader Michael):
Downward pressure on oil prices is so great that crude could trade for as little as $20 a barrel by the end of the year — less than a third of what it traded for this week and an 86% drop from its peak last year, analysts said…
The reasons are simple, said Philip K. Verleger Jr., an expert on energy markets at the University of Calgary in Canada: The still-sputtering economy has lessened demand at a time when there is already a big surplus of oil.
For eight straight months, oil supplies have been running about 2 million barrels a day higher than the global demand of 83 million barrels a day, Verleger said. Eventually, he and others predicted, suppliers will tire of paying to store all of the surplus oil and flood the market.
“That is the largest and longest continuous glut of supply that I have seen in 30 years of following energy prices,” Verleger said. “It’s a huge surplus. There has never been anything like it.”
The market will eventually correct itself, pushing prices down, Fadel Gheit, senior energy analyst for Oppenheimer & Co., wrote in a note to investors. “Excessive speculation and a weak dollar have lifted oil prices to levels not sustainable by market fundamentals,” Gheit wrote.
Crude has traded in the range of about $70 a barrel for much of the last month, closing Thursday at $66.73. The markets were closed Friday.
With so much oil available and so little need for that amount, investors, oil companies and even some banks have bought and stored surplus oil everywhere they can. By one estimate, before oil surged to its high this year of $73.38 a barrel in June, as many as 67 supertankers — each capable of carrying 2 million barrels of oil — were being used as floating storage.
Verleger said it represented a largely risk-free investment for those who could sell that oil for huge profits on the futures markets.
But the glut has gone on for so long, he said, that the cost of all of that storage is bound to rise. When it rises enough, some suppliers will refuse to pay and a lot of that oil will be dumped onto the market.
“Oil will drop to $20 a ba
rrel by the end of the year because this situation just cannot be sustained,” Verleger said.