Oil market "teetering on the edge," warns Verleger
By Jeff Mower on September 28, 2009 10:52 AM
Are oil prices about to take a dive? Analyst Philip Verleger thinks so.
"The oil market is teetering on the edge," Verleger said in a report.
"Prices will fall sharply absent immediate and dramatic action."
Citing poor refinery margins, Verleger argued that producers need to cut
crude production. "Some country or combination of countries needs to
reduce output two million barrels per day," he said. "The cuts should
take effect October 1, 2009."
Because margins are so poor, demand for crude will sink, and prices will
not hold in the $65-75/barrel range cited by technicians. "OPEC, the IEA,
and the 'experts' cited by the major financial newspapers may see
balance in the world crude market. Refiners do not. To be exact, they
see nothing but red ink," Verleger said. "In these circumstances they
curtail runs."
Verleger points to a weakening 3:2:1 crack spread on the NYMEX, which
settled at $2.28/b on September 25, the 69th smallest of 1,239
observations dating back to January 1986. "[I]t is in the fifth
percentile...This is bad, very bad," he said.
Verleger cites not only poor product demand but mounting global
inventories of distillate and gasoline.
"Under today's market conditions, buyers should gamble that producers
(particularly OPEC nations) are 'unwilling to hold.' Sit back and wait.
Prices will fall," Verleger concluded. "While you wait, think of all the
favors the sellers did for you in early 2008."
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