Oil prices overvalued by at least 40%: EU

BERLIN: The price of oil is overvalued by at least 40 percent and should fall to around $80 to $90 per barrel over the longer term, a top European Union economic adviser was quoted as saying on Wednesday.

Klaus Gretschmann, director general for internal market issues at the EU's Council of Ministers, told German daily Die Welt that a speculative bubble had formed around oil prices which would burst, lowering the cost of crude.

"In my view, the price of oil is at least 40 percent overvalued. Twenty percent of the current price is attributable to foreign exchange effects and the weakness of the dollar, another 25 percent are down to speculation," he said.

Average production costs for a barrel of crude were currently around $15 to $25, the paper quoted him as saying in a preview of an article from its Thursday edition. "I expect a clear market correction and that the bubble will burst," Gretschmann said.

"In my analysis, the longer-term price trend is between $80 and $90 per barrel of crude." There were indications that "exaggerations" in oil prices had reached a peak, but it was hard to say exactly when this bubble would burst, Gretschmann added.

Oil prices surged to a record of more than $139 per barrel in the United States last week, and have flirted with that level since. Gretschmann said financial markets had played a "very considerable" role in the recent development of oil prices.

"Since the experience of the US mortgage crisis, financial investments are being shifted from shares and bonds to commodities," he said. "Exaggerations are the result." Institutional investors in particular had spent heavily on commodities and purchased futures contracts in expectation of rising prices, Gretschmann said.

"In the United States alone, the sums involved in this have risen from $26 billion in 2005 to $260 billion at the start of April 2008," he told the paper.
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Wednesday, June 11, 2008
Oil may slip to $75 a barrel, says Goldman's Murti
Barely a month after he stunned the world by saying that oil prices will soon cross $200 per barrel, Goldman Sachs' ace oil analyst Arjun N Murti is now predicting that $200 levels for oil are unsustainable, and the demand for oil will drop drastically pulling down its price to around $75 per barrel.

Murti is not alone in this prediction. The chief economist of Canada's National Bank Financial, Clement Gignac, also holds that oil prices are set to slip to $75 to $80 a barrel.

Speaking to a business magazine, Murti explained that supply of oil in the global market is not likely to rise anytime soon, as most nations are holding back from increasing oil output. Coupled with this, he said, the rising global demand for oil -- especially from India and China -- among other nations is adding to price pressure, leading to the surge in oil tags.

But soon the prices of oil will become untenable, leading to a sharp decline in demand and price. However, some analysts believe that some Organisation of Petroleum Exporting Countries might increase oil production easing the supply pressure and thus helping drive down oil prices.

Saudi Arabia yesterday called for an urgent meeting of oil producing and consuming countries to discuss what it called the “unjustifiable rise in oil prices.” It also offered to coordinate with the Organization of Petroleum Exporting Countries (OPEC) and other major producers to ensure adequate supply in order to curb prices.

The decision to hold an oil conference was taken by the Council of Ministers, chaired by Custodian of the Two Holy Mosques King Abdullah.

“Current oil prices are unjustifiable in terms of petroleum facts and market fundamentals,” the Cabinet said.

However, the Kingdom pointed out that the market has sufficient supply and an increasing commercial inventory. Oil prices surged by nearly $11 on Friday to a new record above $139 a barrel, partly on the weakness of the dollar and also because of increasing tension between Israel and Iran, the world’s fourth largest oil exporter.

“Saudi Arabia will coordinate with the OPEC and other major producers to ensure adequate supply in both the present and the future,” the Saudi Press Agency (SPA) quoted the Cabinet as saying. “The Kingdom will also work to prevent oil prices from rising in an unjustified and abnormal manner, affecting the international economy, especially the economies of developing countries.”

The Cabinet statement disclosed that Saudi Arabia increased oil production this month and had informed oil companies and consuming countries of its readiness to supply additional quantities of oil to meet their requirements.

The Cabinet instructed Petroleum and Mineral Resources Minister Ali Al-Naimi to call for the oil conference, which would include representatives from producing and consuming countries as well as companies involved in production, export and sale of oil, SPA said, adding that the meeting would discuss the reasons for rising oil prices and how to deal with them effectively.

Consuming governments have been putting pressure on OPEC, the supplier of more than a third of the world’s oil, to boost output in order to ease the effect of high prices on their economies.

OPEC blames factors beyond its control, including speculation and political tension, for the price rise. Saudi Arabia boosted output by 300,000 bpd to pump 9.45 million bpd in June, and Al-Naimi said last month the Kingdom was meeting all the demand for its crude.

OPEC President Chakib Khelil said that had it not been for the weak dollar, political tensions and speculation, oil prices would probably be around $70 a barrel. “In terms of fundamentals, there is no problem of supply and demand. There is much more a bubble due to speculation, which is based on a depreciating dollar and geopolitical tensions,” Khelil said yesterday.

The Cabinet praised the outcome of the recently concluded international conference on interfaith dialogue in Makkah, which was attended by more than 600 delegates from around the world.

At the beginning of the meeting, King Abdullah briefed the ministers on the outcome of his talks with Palestinian President Mahmoud Abbas and Pakistani Prime Minister Yousaf Raza Gilani. The Cabinet reiterated Saudi Arabia’s unwavering support for the Palestinian cause.

Crown Prince Sultan, who returned from Spain on Sunday after a four-day official visit, briefed the Cabinet on his talks with Spanish King Juan Carlos and top officials.

The Cabinet hoped that the royal visit would take Saudi-Spanish relations to new heights.

Culture and Information Minister Iyad Madani said the Cabinet meeting also approved the principles and measures to tackle the delay in implementation of government projects by contractors. Earlier, the Cabinet set up a ministerial committee to study the issue.