Forecast - Oil Price to Fall Substantially

Oil Market Is ‘Oversupplied’ With Crude

Saudi Arabia’s Oil Minister Ali al- Naimi said the global “market is oversupplied” with crude even as the world’s largest oil producer cut output last month by more than 800,000 barrels a day.

“Our production in February was 9,125,100 barrels a day,” al-Naimi said, as he arrived in Kuwait for a conference. “In March, it was 8,292,100 barrels. It will probably go a little higher in April. The reason I mention these numbers is to show you the market is oversupplied.”

Saudi Arabia’s spare production capacity is about 3.5 million barrels a day, and its total capacity is 12.5 million barrels a day, he said today.

Saudi Arabia, the biggest oil exporter, has said it will make up for any crude production lost as a result of the Libyan conflict, which erupted in mid-February. The March decline in Saudi output coincides with a decrease in demand from Japan, the world’s third-largest crude user, after the March 11 earthquake that shuttered 29 percent of the Asian nation’s refinery capacity.

“Japan imports 4.2 million barrels a day of oil,” Vice Minister of International Affairs Hideichi Okada said in Kuwait. “The Japanese economic growth rate will decrease to some extent, and that means our demand will slow down. Our demand will slow for a certain period, then our demand will go up again.”

Oil Prices Will Ease in 2012 on Stimulus Withdrawal

Russia, the world’s biggest energy exporter, expects the price of oil shipments to the global market to start decreasing next year as governments begin to withdraw stimulus measures, Finance Minister Alexei Kudrin said.

Urals, the nation’s major export oil blend, will stay above $90 a barrel for 12 months to 18 months, Kudrin told a press briefing in Washington, D.C., yesterday. The price will probably fall to $60 a barrel in the next two years and stay at that level for about six months, he said, reiterating a forecast he made a year ago.

“With oil prices above $110 a barrel we are already in the zone of a slowing global economy,” Kudrin told reporters. “We expect oil prices to begin to decrease next year because excessive liquidity will be withdrawn from the international markets.”


As the reader may recall from my 2011 Forecast, I expected oil prices to decline to $60 per barrel. The latest run up in prices seems to be liquidity driven thanks to QE2 et al, rather than real growth. As I anticipated earlier, the economic engine is beginning to sputter, and with stimulus withdrawn, crude prices are even more likely to fall as fundamentals trump speculation.

There is a caveat on this forecast. If a regional war between "Sunni" Saudi Arabia and "Shiite" Iran were to break out, we could see crude shoot to prices beyond what was experienced in 2008 - $180 to $200 per barrel is possible.

At this stage in the Kondratieff cycle, economic winter is still establishing itself as the dominant force in the global economy. Those who bundle up and protect themselves and their assets, as we have previously described, will weather this season far better than most.