Jim Letourneau's Blog

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Oil Price to Plummet?

In the world of price forecasting you can be reasonably sure that the consensus view will be incorrect. Everyone looks at the same data to derive their forecasts and they come to similar conclusions. In the forecasting business, it is the unknowns that matter most.

Another consideration in the forecasting business is that the closer your prediction is to the mean of other forecasters, the less media attention it will get. The people like their daily does of freaks, geeks and outliers.

The Globe and Mail reports that University of Calgary professor Philip Verleger is predicting $20 oil by the end of the year.

This isn't complicated – we are running out of storage space and the economic situation is not getting any better, by winter we'll have this stuff coming out of our ears.

Verleger says supply is outpacing demand by about two million barrels a day.

Speculators have been filling up storage tanks in hopes of an economic recovery but once those are filled, there won't be much support for the price.

Interestingly, one of the faint hopes for a recovery in natural gas prices is the steep historical discount relative to the price of oil (1 barrel of oil has the energy equivalent of 6 Mcf of natural gas). A drop in oil prices would also restore that balance.