Why Oil Will Not Go Below $50 a Barrel

Who would have thought oil stocks would have led the early 2006 market rally? Warm weather, slowing growth in key markets, high levels of natural gas inventories,and a gradual recovery from hurricane-induced supply disruptions surely should have cooled investor ardor for the energy story.

Notwithstanding these trends, oil markets remain tight. Consequently, according to one industry analyst, Steve Terry, prices likely will remain high and may exceed last year’s peak levels in the coming months. Any disruption, such as one that might arise from a political confrontation with Iran or violence in Nigeria, will cause another spike up. “I’ve always tended to be dismissive of supply security as an issue,” Mr. Terry admits. “Now it is the big issue.”
Mr. Terry was for many years a part-owner and top executive with Britain-based Petroleum Economics, which was sold a few years ago to KBC Process Technology. Recently, he and former PEL colleagues have started up Citac Global, a consultancy providing in-depth energy research to companies and governments. He was in New York last week speaking at Burnham & Company to energy specialists in the financial community.

One bright spot in his presentation is the longer-term outlook. Mr. Terry thinks the Saudis will be the world’s swing oil producer for many years to come.That is, he does not buy Matthew Simmons’s argument, put forward in his widely read book, “Twilight in the Desert: The Coming Oil Shock and the World Economy,” that Saudi production is nearing its zenith, and that many of their important fields will start to decline in a few years. Why? Mr. Terry’s knowledgeable contacts in the Middle East have convinced him that Saudi production can grow significantly from current levels.

New York Sun