Crude oil at $20 to $40 a barrel by end 2009

You want deflation? We do deflation.

I'm glad to say that it isn't ignorant old Otto that's calling a barrel of crude at $20 to $40 by year's end, but a couple of experts that actually know what they're talking about. Frankly, if I were The Studmuffin I'd be hedging my whole country's output right now. Here's the must-read link to the LA Times article and here are a couple of excerpts to get your juices running.

"The reasons are simple, said Philip K. Verleger Jr., an expert on energy markets at the University of Calgary in Canada: The still-sputtering economy has lessened demand at a time when there is already a big surplus of oil.

"For eight straight months, oil supplies have been running about 2 million barrels a day higher than the global demand of 83 million barrels a day, Verleger said. Eventually, he and others predicted, suppliers will tire of paying to store all of the surplus oil and flood the market.

"That is the largest and longest continuous glut of supply that I have seen in 30 years of following energy prices," Verleger said. "It's a huge surplus. There has never been anything like it."

"The market will eventually correct itself, pushing prices down, Fadel Gheit, senior energy analyst for Oppenheimer & Co., wrote in a note to investors. "Excessive speculation and a weak dollar have lifted oil prices to levels not sustainable by market fundamentals," Gheit wrote.

"With so much oil available and so little need for that amount, investors, oil companies and even some banks have bought and stored surplus oil everywhere they can. By one estimate, before oil surged to its high this year of $73.38 a barrel in June, as many as 67 supertankers -- each capable of carrying 2 million barrels of oil -- were being used as floating storage.

"Verleger said it represented a largely risk-free investment for those who could sell that oil for huge profits on the futures markets. But the glut has gone on for so long, he said, that the cost of all of that storage is bound to rise. When it rises enough, some suppliers will refuse to pay and a lot of that oil will be dumped onto the market. "Oil will drop to $20 a barrel by the end of the year because this situation just cannot be sustained," Verleger said.

"Bob van der Valk, a fuel price analyst, predicted that oil would drop to $40 by the end of the year and that Californians would be paying about $2 a gallon for regular gasoline. "In normal years you have seasonally adjusted pricing, and 2009 is looking like our first normal year since 2006," Van der Valk said. "By year's end, oil and gasoline will be coming down."

Bernanke Saves Chávez

Now, what was all that about non-payments and immediate devaluations? Here's the 90 minute chart:

Venezuela Oil: Incakola leads, the rest follow

Fresh Juice Served Here

Still getting your LatAm news from the newswires? How very 1990's of you..........
Still waiting for overpaid analysts to speak before making your mind up? Oh, how passé......

It seems the LatAm movers, shakers and powers-that-be read this humble corner of cyberspace. On Sunday and Monday, your on-the-ball Otto explained why (contrary to popular opinion), Venezuela wasn't in any immediate trouble from the North's financial meltdown and oil prices where they are will suffice. Today, Reuters finally gets round to telling the world their own version of the story which is....well....it's the same.

Here's the link to Brian Ellworth's analysis report, and putting the silly snark aside I have to say he's done a good job, found the right people to quote and got it just about right imho (except getting that old chestnut about devaluation in there...that's nonsense). Some extracts:

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Venezuelan President Hugo Chavez will likely emerge unscathed from the current global financial contagion even if tumbling crude prices force the oil-dependent OPEC nation to scale back spending in the coming months.......

"They're going to have to tone down the usual expenditure programs, but it's obviously not an emergency situation," said Enrique Alvarez, head of Latin American debt strategy with financial research group IDEAGlobal..........

....And the nation's economy will not collapse overnight -- even if the credit crisis drastically reduces oil prices........

.....a fall in oil prices below $80 per barrel would give Chavez less money for social programs and trim down the nation's robust current account surplus. "But Chavez has ample financial public assets to draw from even in the event of a sustained oil price fall,"

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So go read the whole Reuters article and then check back at my posts from earlier this week; you'll see it's the same argument and then (almost certainly) marvel at how prescient Otto really is. Do IDEAGlobal and Eurasia Group read Incakola news? Maybe someone there writes Incakola news? YOU BE THE JUDGE!

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Squirm
Venezuela, and why $70/bbl is enough in 2009

Spooky chart

The blue line is WTI crude, November 2006 to date

The red line is the Nasdaq index overlaid on the chart with its now infamous peak in early 2000 (and before you ask, the timescale is 1:1 and has not been stretched or compressed in any way).

The correlation between the two lines is 96.65%, according to the guy who sent me this last night (he sent it as an Excel file and the numbers do seem to check out correctly. FWIW I regenerated this chart to check them myself.).