Analyst: Oil at $55 Near-Term, $175 Long-Term

TV segments on high oil prices were popular throughout 2008 as oil rose to $140 – some commentators warned of the worst and predicted hardship for consumers. But as the price of oil retreated and the price of gasoline fell, predictions about oil have been less frequent.

However, Paul Sankey, Deutsche Bank’s oil analyst, appeared on CNBC’s Oct. 5 “Power Lunch,” and raised his concerns about the long-term future of the price of oil. According to Sankey, there are some reasons not to be bullish on oil – hybrids, China and OPEC.

“The way we see it, it’s telling you Saudi is effectively under-producing,” Sankey said. “That if they were to produce as much as they could, oil would be a lot lower in price. We think that the price of around $70 is, as they say, fair for both sides of the equation. But ultimately we do think that long-term it’s in Saudi’s interest to try and bring prices down. The point of the note today is that with hybrids coming in, with the Chinese planning their economy away from oil, with natural gas being so relatively cheap, the long-term future for oil beyond 2016 looks extremely challenging and we think a big part of that is OPEC under-producing.”

But, despite those obstacles, foresees American consumers spending nearly 8 percent of gross domestic product on oil by 2016 – hence the $175-a-barrel prediction.

“Well the big idea, because governments now control the oil, including Russia, you can’t see a reaction to oil supply to high prices,” said Sankey. “There’s no response there. And so what we need to do is break oil demand. And the problem with doing that is that prices are controlled in China. They’re subsidized in the Middle East. They’re high-taxed in OECD (Organisation for Economic Co-operation and Development), ex-U.S. We need to break U.S. demand. And at $2.50 a gallon – we’re not doing that. We need to drive prices to the point that American consumers change their behavior and use less oil and that point is about seven-and-a-half percent of U.S. GDP. By 2016 that equals about $175 a barrel on a spike basis and that’s how we get that very high-seeming number.”

Sankey said his prognostication could prove to be wrong should Russia continue its current pace of high output and should the situation in Iraq improve.

“I think that’s a great point,” Sankey added. “I mean, Russia’s outperforming expectations right now. If they continue to, we could see much lower oil prices, particularly if Iraq works out. I think you need Iraq and Russia to work out well. And then you can ask yourself really whether or not our forecasts will be right.”