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Lehman analysis says oil will rise, deflates ‘bubble’ theory |
LONDON: Crude oil will average $60 a barrel in the first quarter of this year and is poised to rise through 2008 on higher demand in the US and China, Lehman Brothers Holdings Inc said.
World oil consumption will rise by at least 1.7mn bpd this year, led by China, according to Edward Morse, Lehman’s New York-based chief energy economist. Signs of an economic slowdown in the US, the world’s largest energy consumer, haven’t trimmed “robust” use of fuel, he said.
The US gross domestic product expanded at an annual pace of 2.2% last quarter, compared with 3.5% reported on January 31, the government said this week.
US thirst for gasoline, which typically grows 1.5% to 2% a year, has not been slaked. Motorists used 3.6% more fuel in the four weeks ended February 23 than a year ago, according to the Energy Department.
US motor fuel consumption “is growing at a level that is totally inconsistent with the GDP numbers,” Morse said in a phone interview while traveling in Dubai on Thursday.
China’s share of global oil consumption has risen from 3.5% in 1990 to about 8.2% in 2006, William Poole, president of the Federal Reserve Bank of St Louis, said in an interview on Friday.
Economic growth in China, the second-biggest energy consumer, has averaged 10% a year for five years.
US crude oil usage is 1mn bpd higher than a year ago, Morse estimates. The country’s demand will rise about 300,000 bpd this year, Lehman analysts led by Morse wrote in a February 23 report. The figure is “the minimum in US demand” if current trends continue, he said by phone.
US gasoline supplies fell for a third time last week, even as output rose for the first time in nine weeks, the Department of Energy said on Tuesday. Daily usage averaged 9.1mn barrels. The nation consumes 25% of the world’s oil. “People are driving in part because the winter was a lot milder in the early part of January,” Morse said. “Robust gasoline demand in the last four weeks,” during colder weather, shows “people have gotten back to their normal habits.”
WTI futures have averaged $56.94 a barrel in New York this year.
Morse joined Lehman Brothers last year after working as an executive adviser at Hess Energy Trading Co, a unit of Hess Corp, the fifth-largest US oil company. Morse was president of Energy Intelligence Group, a news publisher, from 1988 to 1999.
Oil will not deflate in a “bursting bubble,” Morse and colleagues Adam Robinson, Michael Waldron and Ashutosh Agrawal said in the report. “We do not envisage an environment in which an alleged speculative commodities bubble could burst in 2007 or 2008.”
The bubble argument, while “increasingly sophisticated,” is supported by “spurious” supply and demand reasoning, they said.
Sanford C Bernstein & Co analysts led by London-based Neil McMahon said last month that oil may drop to $40 a barrel in March and could fall to $30 as speculative investors, fed up with poor returns, flee the market.
Oil will slide, Bernstein said, because investment in commodity futures has driven the market into contango, which means futures prices are higher than spot prices.
In a contango market, even as oil rises, investors can lose money when contracts expire because they are forced to buy at higher prices. Lehman agrees that speculative investment in oil may slow in 2007, and that oil will decline at some point, but not as a result of a bursting bubble.
Morse’s estimate of global oil demand growth of at least 1.7mn bpd is higher than those of the International Energy Agency and Opec. – Bloomberg
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