Analysts: Crude Prices Ripe for a Fall

BLOOMBERG - - "Did you know there's a world surplus of crude oil?" asks Bloomberg columnist David Pauly. According to analysts, the production of low-sulfur crude exceeds global demand by about 1 million barrels a day, or 1.2 percent of consumption.

So why, posits Pauly, are oil prices so high? They reached a record high of $78.40 in July and have hovered in the $70s ever since.

Charles Maxwell, oil analyst at Weeden & Co. in Greenwich, Conn. says to count your blessings because without the excess surplus, oil prices would be in the $90s thanks to unrest in Nigeria, production cuts in Iran and Venezuela, and BP's pipeline shutdown.

Maxwell's two-year forecast for oil is that it will trade between $55 and $75, remaining mostly in the $60s. Maxwell says that oil prices "may actually decline into the $60s next spring, when supplies usually become more abundant, if U.S. economic growth continues to abate."

Maxwell cites energy conservation and the fact that "we're running out of bad things that can happen" for his forecast.

Ben Dell, analyst at Sanford C. Bernstein & Co. in New York tells Pauly that crude oil prices are "ripe to fall considerably." In addition to the crude surplus, Dell points to a drying up of buying by pension funds and hedge funds.

Dell says that the funds have been buying crude on the spot market and reselling for future delivery it at a higher price. But, explains Dell, the storage facilities the funds are using are beginning to reach capacity. Dell gives them about four to six months before they'll need to stop buying oil.

Dell says that, based simply on production costs, crude oil prices should be about $50 a barrel, but a premium is put on oil because of "increased investor interest and concerns about supply disruptions for political or military reasons."

Pauly also has an opinion on the future of oil prices. His hunch is that they "may soon drop even more than the experts think possible."