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As oil reaches $49.06 per barrel this morning, Stearns predicts that prices will collapse to $25 per barrel next year. The prediction by Bear Stearns analyst Frederick Leuffer came in private note to clients earlier this week, according to a CNN news report.
The reasoning is as follows: During the last year, concerns about oil supplies have caused companies to increase their own private inventories of oil. Indeed, U.S. commercial inventories of crude oil are 5% above last year's level, according to the Wall Street Journal.
Therefore, the Stearns reasoning continues, this almost panic-like stocking up of oil inventories has created an "oil bubble." Once the inventory build-up ends, according to Stearns' research, the actual market fundamentals support only a $25 per barrel price. Prices close to $25 would be maintained even if a terrorist act caused a temporary supply shock, because of the large inventories of oil on hand.
This is definitely a minority position. Most analysts believe that there's an inventory build-up bubble that has added $10 to the price of oil, but has not doubled the price. This would indicate that oil prices will fall to the $30s.
However, other analysts believe that high oil prices are here to stay. The main reason is the ever-increasing demand from China and India. China's crude imports increased by 40% over last year, and India's are increasing at the rate of 11% over last year.
Just a few years ago, there was only one massive oil consumer - the
U.S. Today, there are three, all competing for a limited oil supply.
It's hard to see how oil prices are going to fall dramatically unless
at least one of these three economies has a deep recession.
(20-Aug-04)
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