Tags: crude | oil | price | decline

How Low Can Crude Oil Go?

By    |   Wednesday, 17 Sep 2008 11:36 AM

Remember that oil analyst at Goldman Sachs who shocked the markets with estimates that oil would hit $200 a barrel, or higher?

Try $60, maybe less, and soon.

Goldman's famously bullish oil team now sees crude to $123 a barrel on average in 2009 — cutting their own, latest forecast by a huge $25.

It's not really good news.

A lot of the comedown in oil prices can be attributed to a rising dollar (good) and a decline in speculation (also good), but what's really driving down oil is the growing consensus that the global economy is cooked.

"We stand by our bullish view on oil, but just think it will now take longer to get to our previous price targets," Goldman's commodity research team told its clients on Sept. 16.

Translation: We were wrong, but not for the reason you think.

Sure, long-term demand is unavoidable. Yeah, we're probably still running out of the stuff. But the bottom line for the next few months or maybe a year or more is that the huge growth spike once considered a given is just not going to be there.

In the same report, Goldman cut its three-month forecast to $115 a barrel from $149, and its six-month target to $125 a barrel from $142.

Oil is trading in the high $80-range in the past few days after hitting $147 in July.

How low could it go? Could be $75 a barrel if a global recession gets some traction, notes Goldman analyst Jeff Currie.

Remember, though, that Goldman is by far the most bullish of oil forecasters. The latest Reuters poll puts the mean price of oil at just over $113 in 2009, on average, compared to Goldman's former stand at $148.

The Saudis realize this is coming on fast. Even as OPEC agreed to cut production to shore up the falling price, the kingdom promised U.S. leaders it would ignore that very agreement and keep the oil coming.

Why? Because the Saudis know that a full-blown global economic crisis will feed on itself, and that will really kill oil consumption just as supply ramps up.

Result: free-falling oil and a wasp's nest of unintended consequences at home, social, political, military, and economic. So the Saudis hope a "reverse oil shock" — lots of cheap oil in the short-term — will save the world economy and keep the pain at a minimum.

Another purely financial factor, according to some analysts, is that banks like Lehman Holdings are unwinding commodities positions as they enter bankruptcy.

"It's like a snowball effect," James Cordier, president of Tampa, Fla. trading firms Liberty Trading Group and OptionSellers.com, told the Associated Press.

"The unwinding of all this debt is getting oil prices to go to these levels much quicker than people thought possible."

Phil Flynn, an oil analyst with Alaron Trading, warned the LA Times that "we opened up the floodgates to the downside."

"Now that we're below $100, I think we're going to the $80s, and I think it is possible that we could go all the way to the $60s," Flynn said.

Guess what? We're in the $80s right now, and looking down from there.

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Remember that oil analyst at Goldman Sachs who shocked the markets with estimates that oil would hit $200 a barrel, or higher?Try $60, maybe less, and soon.Goldman's famously bullish oil team now sees crude to $123 a barrel on average in 2009 — cutting their own, latest...
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Wednesday, 17 Sep 2008 11:36 AM
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