Lehman Says Oil Will Rise, Deflates `Bubble' Argument (Update2)
bloomberg.com
By Eduard Gismatullin
March 2 (Bloomberg) -- 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 U.S. and China, Lehman Brothers Holdings Inc. said.
World oil consumption will rise by at least 1.7 million barrels a day this year, led by China, according to Edward Morse, Lehman's New York-based chief energy economist. Signs of an economic slowdown in the U.S., the world's largest energy consumer, haven't trimmed ``robust'' use of fuel, he said.
The U.S. gross domestic product expanded at an annual pace of 2.2 percent last quarter, compared with 3.5 percent reported Jan. 31, the government said this week. U.S. thirst for gasoline, which typically grows 1.5 percent to 2 percent a year, has not been slaked. Motorists used 3.6 percent more fuel in the four weeks ended Feb. 23 than a year ago, according to the Energy Department.
U.S. 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 yesterday.
China's share of global oil consumption has risen from 3.5 percent in 1990 to about 8.2 percent in 2006, William Poole, president of the Federal Reserve Bank of St. Louis, said in an interview today. Economic growth in China, the second-biggest energy consumer, has averaged 10 percent a year for five years.
Driving Americans
U.S. crude oil usage is 1 million barrels a day higher than a year ago, Morse estimates. The country's demand will rise about 300,000 barrels a day this year, Lehman analysts led by Morse wrote in a Feb. 23 report. The figure is ``the minimum in U.S. demand'' if current trends continue, he said by phone.
U.S. 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 Feb. 27. Daily usage averaged 9.1 million barrels. The nation consumes 25 percent 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. Oil for April delivery fell 10 cents to $61.90 a barrel on the New York Mercantile Exchange at 11:54 a.m.
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 U.S. oil company. Morse was president of Energy Intelligence Group, a news publisher, from 1988 to 1999.
What Bubble?
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.
IEA, OPEC Forecasts
Morse's estimate of global oil demand growth of at least 1.7 million barrels a day is higher than those of the International Energy Agency and OPEC.
The IEA, an adviser to 26 nations, said last month that consumption will grow 1.55 million barrels this year to 86 million barrels a day. The Organization of Petroleum Exporting Countries, the producer of 40 percent of the world's crude, estimated in February that usage will rise 1.24 million barrels.
Lehman Brothers expects West Texas Intermediate, the U.S. benchmark, to average $68.50 a barrel this year and $76 next year.
Other analysts expect oil to drop because of slowing economic growth and an increasing surplus of supply capacity. Oil futures have dropped 21 percent from a record $78.40 reached July 14 in New York.
``For the full year we have a lower prediction,'' said Frederic Lasserre, head of commodities research at Societe Generale, France's second-biggest lender. ``We think we'll see a pronounced-enough slowdown and the possibility of the price falling to $50 a barrel by the end of the year.''
Iran Sanctions
Lehman is among analysts who say the price of oil is supported by tension over Iran's nuclear development program.
``People have more concerns about the future,'' particularly in the Middle East, said Kenichiro Yamaguchi, chief operating officer for Petro Diamond Risk Management Ltd. in London, a unit of Mitsubishi Corp., Japan's largest trading company.
Iran, the world's fourth-largest oil producer, last week defied a UN deadline to stop uranium enrichment. United Nations Security Council members are discussing further sanctions.
``Iranian defiance'' is one of the most influential factors keeping oil near $60 a barrel, Morse said.
To contact the reporter on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net
Last Updated: March 2, 2007 12:10 EST |
