Associated Press
Oil Contrarian Sees Bubble Ready to Burst
Monday April 4, 5:48 pm ET
By Brad Foss, AP Business Writer
Crude Oil Contrarian Believes Oil Prices Could Plummet to $28 Per Barrel As Early As Summer
Most energy analysts on Wall Street expect oil prices to remain high for the foreseeable future because of strong demand and limited supply.
Then there is Tim Evans, a contrarian who says today's crude oil prices above $50 a barrel reflect nothing more than a market bubble fed by speculation and unwarranted fear. Evans, a senior analyst at IFR Energy Services in New York, believes oil prices could plummet to $28 a barrel as early as this summer.
"I guess that makes me the lunatic fringe," Evans said, followed up by a burst of laughter.
Evans' basic message is that the world's oil supply is sufficient to meet demand, that motorists will soon show that they're not willing to pay any price for gasoline and that the market is unreasonably receptive to worst-case-scenario thinking.
The 45-year-old analyst, who earned his bachelor's degree in mineral economics from Pennsylvania State University, has led energy research at IFR, a division of Thomson Financial, for the past 10 years, following stints as a copper trader and an analyst at a mining concern. Evans writes a twice-daily technical analysis of the petroleum markets that costs $395 a month and is read by institutional investors, major oil companies, fuel distributors, traders and journalists.
Oil prices began rising above historical norms a few months before the U.S. invaded Iraq and have maintained their upward momentum since then due to rising demand, a shrinking supply cushion and market worries about everything from a hurricane in the Gulf of Mexico to pipeline sabotage in Iraq. The declining value of the dollar and increased hedge fund activity on futures markets have magnified the runup.
Rapid economic growth has largely masked the negative impact of high oil prices in the U.S., analysts say, though the airline industry has been stung, as have low-income families and those living on fixed incomes. Gasoline demand is about 2 percent higher than a year ago in spite of pump prices averaging $2.15 a gallon.
Veteran oil market analyst Peter Beutel of Cameron Hanover Inc. said Evans' outlook is not as crazy as his willingness to publicly stick out his neck.
"I don't disagree oil prices are going to drop precipitously at some point," Beutel said. "But, boy oh boy, they tell analysts to pick a time or pick a price, but don't do both. I certainly honor his bravery."
When pressed to do just that, Beutel said he could envision $28 a barrel, too -- in 2008.
Most oil analysts have steadily raised their oil price forecasts over the past two years, keeping themselves in sync with the market's upward momentum.
They back up their upward revisions with data pointing to a limited global supply cushion at a time of rising demand, particularly in the United States and China. They also cite the declining value of the dollar and they voice fears about possible supply disruptions all around the world: from labor strife in Nigeria to refinery snags in America.
Goldman Sachs analyst Arjun Murti last week raised his forecast for 2005 from $41 a barrel to $50 a barrel. The report said the market may be in the early stage of a "super spike" that sends prices as high as $105 a barrel -- the price Goldman Sachs said may be necessary to significantly curb energy consumption.
The report has contributed to a recent rise in crude futures on the New York Mercantile Exchange, where oil for May delivery settled Monday at $57.01 a barrel. Nymex futures closed at a record $57.27 a barrel on Friday.
Evans scoffed at the Goldman Sachs report, saying "the probability of reaching that price level is so small it's, like, laughable."
"Yes, $105 could happen. Texas could slide into the Gulf of Mexico. There could be a nuclear war with Iran. But you know that in a scenario like that I somehow don't think the world economy is going to be screaming for more oil."
Evans is not the only contrarian -- there are still a handful of analysts forecasting prices below $40 a barrel in the second half of the year -- but he may be the most blunt voice of opposition to the bullish market consensus. He sums up the group-think this way: "Greed makes you stupid."
Some of Evans' main arguments are as follows:
-- There is no worrisome lack of supply. With 1.8 million barrels a day of excess production capacity, Saudi Arabia can quickly pump enough oil to offset any disruptions, short of the most catastrophic scenarios.
"Oil prices have been rising for the last 18 months on hypothetical supply disruptions," Evans said. "Every time we come up with a new 'what if?', the oil price manages to go $5 higher."
-- Higher prices will eventually cause gasoline demand, which is now about 2 percent higher than a year ago, to taper off. And higher prices will lead producers, including Saudi Arabia, to pump more oil.
-- The U.S. Strategic Petroleum Reserve, which the Bush administration has been filling at an average rate of nearly 250,000 barrels a day, is nearly full. By August, the market should have that much more supply of light, sweet crude available to it.
All of these factors have been ignored, Evans said, by the growing number of hedge funds and other speculators betting on crude futures, proving only that there is demand at any price for "paper barrels."
When asked why the market would ignore what he considers to be an adequate supply situation and instead focus on everything that could wrong to disrupt it, Evans answered with a question.
"Why did people chase Internet stocks in the late 1990s, and why did they shift from looking at earnings to looking at revenues and from looking at revenues to looking at the number of hits on a Web site as a method of valuation?"