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Analyst sees $150 oil within a month

GlobeandMail.com

Analyst sees $150 oil within a month

Globe and Mail Update

Record demand from Asia will likely send oil prices rocketing to $150 (U.S.) a barrel by July 4, a U.S. analyst predicted Friday, triggering an immediate jump of more than $6 to $134 a barrel in New York.

“We are calling for a short-term spike in oil prices,” analyst Ole Slorer at Morgan Stanley in New York told clients in a report. “Middle East oil exports are stable, but Asia is taking an unprecedented share.”

He said that the patterns of crude oil distribution from the Middle East are “mimicking” those seen towards the end of the third quarter last year, when he also predicted an oil-price spike based on projections of sharp inventory reductions in the Atlantic basin.

“That same pattern is now again upon us, and we are making an identical call, only this time, we are starting from a much tighter Atlantic Basin inventory,” Mr. Slorer said.

U.S. inventories are down by 35 million barrels since March, he added.

“Middle East exports, the swing supplier into the Atlantic, is sending record volumes into Asia … while supplies into the Atlantic are hitting rock bottom,” Mr. Slorer wrote. “This has caused ‘oil in transit’ to the Atlantic … to collapse by more than 20 million bbls since March.”

After jumping in Europe earlier in the day, the contract for light sweet crude to be delivered in July climbed to $134.06 on the New York Mercantile Exchange, up $6.27.

This was on top of a $5.49 gain Thursday, reportedly the largest single-day increase in the history of the Nymex contract.

In a separate report Thursday, Mr. Slorer also dismissed one of the latest theories as to why energy prices are so high in developed economies. This theory has it that fuel subsidies in emerging market economies are preventing oil demand being destroyed by high oil prices, but that mounting fiscal pressures will force governments to cancel the subsidies before too long.

However, Mr. Slorer argues that most countries with gasoline prices below the U.S. benchmark of $4 a gallon – thanks to subsidies – are themselves oil exporters, including Venezuela, Nigeria, Iran, Saudi Arabia, Kuwait, Qatar and the United Arab Emirates. He reckons they have no incentive to cancel those subsidies.

“Given a fixed level of domestic gasoline prices, the incremental revenue generated by shipping crude at inflated prices often more than offsets the additional cost of subsidizing local consumption,” he said. “We reckon that higher [crude prices] will only lead to higher subsidies in oil-exporting countries.”

As well, selling gasoline at “reasonable prices” is one way for the now cash-flush oil exporters to give something back to their people, something they need to do from a social perspective, he said.

The only thing that would lead to these countries reducing the subsidies is a dramatic fall in oil prices, Mr. Slorer added. “But this oil price drop will not be ignited by demand destruction resulting from gasoline subsidy cuts.”

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