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Oil Curve Steeper '99 Shows Possible Increase '09

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    Charles Randall
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    Oil Curve Steeper Than ’99 Shows Possible Gain in ’09 (Update1)

    By Stuart Wallace and Tim Coulter
         Jan. 5, 2008 (Bloomberg)
    The steepest plunge in crude prices
    on record may be setting up oil investors for a rally this year,
    if history is any guide.
         The so-called forward curve of futures contracts traded on
    the New York Mercantile Exchange suggests oil will rise 28
    percent to $60.10 a barrel by December.
    The curve looks almost
    the same as 10 years ago, after Russias default and the
    collapse of the Long-Term Capital Management LP hedge fund
    raised concerns that a global economic slowdown would reduce
    energy demand. Crude prices fell 25 percent in the final quarter
    of 1998, the steepest drop in seven years.
         Bets on a recovery paid off then as the Organization of
    Petroleum Exporting Countries cut production 6.9 percent,
    causing prices to more than double in 1999. Now, OPEC is
    pledging to reduce supply 9 percent, companies from Royal Dutch
    Shell Plc to Valero Corp. are postponing new energy projects and
    central banks are cutting interest rates to end the worst
    financial crisis since World War II.
         The world economy will get into a more stable environment
    most probably in the second half of next year, said Christoph
    Eibl, who helps manage more than $1 billion at Tiberius Asset
    Management AG in Zug, Switzerland. Commodities are thus due
    for a rebound. Crude oil has the best potential.
         Eibls Absolute Return Commodity Fund gained 7.5 percent
    last year in part by betting on agricultural commodities and
    industrial metals. He beat the Standard & Poors GSCI Index of
    24 commodities, which dropped 43 percent, and oil, which fell 54
    percent. A 30 percent gain this year would be the most since the
    57 percent jump in 2007.

                            Forward Market

         Traders are already taking advantage of prices in the
    forward market exceeding those for immediate delivery, a so-
    called contango. About 26 million barrels of oil may be stored
    in tankers until later in the year. The crude, valued at $1.2
    billion at todays prices, will be worth $1.57 billion based on
    December contracts, potentially locking in a profit for
    investors after expenses for financing, storing and insuring the
    oil.
         Crude for February delivery traded at $46.89 a barrel at
    9:50 a.m. in London today, compared with $60.10 for the December
    2009 contract. At the end of December 1998, oil for February
    1999 was at $12.05, compared with $13.78 for December of that
    year, a difference of 14 percent.
         Twenty-eight of 30 analysts tracked by Bloomberg forecast
    higher prices by the end of 2009, with a median fourth-quarter
    estimate of $70.

                              Most Bearish

         Adam Sieminski, the chief energy economist at Deutsche Bank
    AG in Washington, is the most bearish. He said in December that
    oil will trade at $40 in the fourth quarter, almost 14 percent
    lower than the Jan. 2 close, data compiled by Bloomberg show.
    Slowing economies may cut demand by about 700,000 barrels a day
    this year, he said.
         While commodity prices have fallen sharply from their
    July 2008 peaks, I see a further 15 to 20 percent downside risk
    for commodities into 2009 and maybe a recovery of those prices
    only toward the end of the year if there are signals of a global
    economic recovery, said New York University Professor Nouriel
    Roubini, who predicted the global financial crisis.
         The duration of the slowdown remains the biggest risk to a
    rebound in raw materials. Japan, the worlds second-biggest
    economy, may not return to growth until the fourth quarter,
    while the euro-area will shrink through this year, according to
    Bloomberg surveys of economists.
         Oil rallied in 1999 as OPEC reduced output by 1.71 million
    barrels a day, equal to what is pumped today by Libya, the
    largest producer in North Africa.

                             Reduced Supplies

         The group reduced supplies after Russias default in August
    1998 sparked concerns about a meltdown in financial markets and
    Long-Term Capital Managements $4 billion loss in leveraged
    trading strategies forced the New York Fed to organize a rescue
    of the fund by 14 banks and securities firms.
         Last year was even worse. Commodities prices fell the most
    in five decades as crude dropped more than $100 from the peak of
    $147.27 in July. Losses and writedowns at financial firms rose
    to hundreds of billions of dollars and simultaneous recessions
    hit the U.S., Europe and Japan for the first time since World
    War II. The Standard & Poors 500 Index tumbled 38 percent and
    about $29 trillion of global equity market value evaporated.
         The combination of central banks pumping trillions of
    dollars into the global financial system and OPECs resolve to
    stop the plunge in crude is making investors more bullish.

                            Bring Stability

         OPEC is determined to bring stability to the oil
    market, Saudi Oil Minister Ali al-Naimi said Dec. 21 in
    London, and Saudi Arabias King Abdullah said in November that
    $75 was a fair price. That month his nation cut output by 3.2
    percent, the most since April 2006, data compiled by Bloomberg
    show.
         OPEC will reduce daily crude shipments by 1 percent in the
    four weeks to Jan. 17 as the group enacts the supply cuts it
    agreed in Algeria last month, according to industry consultant
    Oil Movements.
         The Federal Reserve cut its benchmark interest rate to as
    low as zero for the first time and the incoming administration
    of President-elect Barack Obama will seek as much as $850
    billion in new spending and programs, congressional officials
    have said. China unveiled a 4 trillion-yuan ($585 billion)
    economic stimulus plan in November and European Union leaders
    are drawing up packages worth about a combined 200 billion euros
    ($278 billion).

                               U.S Shrinks

         The U.S. economy will shrink 2.4 percent this quarter,
    following a contraction of 4.35 percent in the three months that
    just ended, according to economists surveyed by Bloomberg. The
    worlds biggest oil consumer will contract 0.5 percent in the
    second quarter before expanding 1.3 percent and 1.8 percent in
    the next two quarters, the forecasts show.
         Once these economies kick in again with the money supply
    pouring into these economies, everybody is going to be caught
    short with no inventory of these commodities and then commodity
    prices will move up again, said Mark Mobius, executive
    chairman of Templeton Asset Management Ltd. in Singapore, who
    oversees about $26 billion in emerging-market stocks.
         Oil tumbled almost $115 a barrel from its July record. Pump
    prices for gasoline in the U.S. that peaked at an average $4.165
    a gallon are down to $1.67 nationwide, according to the Energy
    Department.
         Low prices in themselves do not normally create demand
    for commodities but for oil they do, said Tim Mercer, chief
    investment manager at Hong Kong-based hedge fund Musahi Capital
    Ltd. Should the economy recover this year, $80 to $100 oil is
    quite possible, he said.

                            World Consumption

         World oil consumption will increase by 400,000 barrels a
    day, or 0.5 percent, to 86.3 million a day this year, according
    to the Paris-based International Energy Agency. Oil demand in
    2008 fell for the first time since 1983, the IEA estimated.
         A rebound would reward everyone from Irving, Texas-based
    Exxon Mobil Corp., the worlds largest publicly traded company,
    to Saudi Arabia, the biggest producing nation. The Persian Gulf
    states budget drops into a deficit at prices below $50 a
    barrel, according to Fitch Ratings.
         Until prices improve, oil companies are delaying
    investments and shutting plants, threatening to reduce supply
    further.
         Shell, based in The Hague, postponed a decision to expand
    its Athabasca oil-sands project in Canada. Valero Energy, the
    largest U.S. refiner, said in October it will defer projects to
    cut spending by about $500 million, or 17 percent.

                              Refinery Halt

         ConocoPhillips agreed to halt bidding for a planned 400,000
    barrel-a-day export refinery in Saudi Arabia because of falling
    prices.
         The recovery in oil will pace at least a 20 percent return
    from commodities in 2009, Tiberiuss Eibl said. Futures
    contracts signal at least a 10 percent appreciation in corn and
    wheat on the Chicago Board of Trade and a 12 percent gain in
    cotton. Copper on the London Metal Exchange will lag behind,
    while gold is likely to end 2009 little changed, futures show.
         The dollar is going down, said Jim ONeill, chief
    economist at Goldman Sachs Group Inc. in London. If thats
    right, gold is definitely going to continue its recent recovery
    and I think that might give some support to oil prices as well,
    despite the weak fundamentals.
         The U.S. Dollar Index traded on ICE futures in New York,
    which tracks the currency against six others, advanced 6 percent
    last year, the best performance since 2005.

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