Deutsche Bank Forecast

Oil May Rise Until Demand Collapses, Says Deutsche
By Ayesha Daya
April 28 (Bloomberg)

There is a ``huge risk'' that oil prices will continue to rise until demand collapses because additional supplies are limited and alternative fuels decades away from replacing crude, Deutsche Bank AG said.

``There is a huge risk that the oil price simply continues to escalate until it gets to some level ($200 a barrel?) when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now,'' Deutsche Bank's chief energy economist Adam Sieminski wrote in a report dated April 25.

Oil demand previously collapsed in the early 1980s, after nominal oil prices rose tenfold between 1970-73 and 1980-83, to $35 a barrel from around $3.50. Oil averaged about $25 a barrel from 2000-03, suggesting prices would have to increase to $250 a barrel in 2010-13 to have the same impact on oil users this time around, Sieminski said. Deutsche Bank's price forecast for Brent and West Texas Intermediate oil next year is $102.50 a barrel.

Oil prices have surged 82 percent in the past year as investors purchased contracts as a hedge against the dollar, which fell to a record low against the euro, and as an alternative to flagging equity markets. Crude oil rose to a record $119.93 a barrel today after BP Plc shut a North Sea pipeline and gunmen attacked police guarding Nigeria's largest oil and gas terminal.

Investment Needs

Additional oil supplies will come only from the Organization of Petroleum Exporting Countries, which produces 40 percent of the world's oil, because non-OPEC output will need ``enormous levels of investment'' just to maintain current levels of production.

``However, much of the remaining oil-in-the-ground in OPEC is run by National Oil Companies that have, by and large, been starved of investment capital by their own governments, for example Venezuela, Nigeria, Iran,'' Sieminski said.

The exception is Saudi Arabia, which holds the world's largest oil reserves. The country has no plans to raise output beyond its 2009 target of 12.5 million barrels a day, Oil Minister Ali al-Naimi said in an interview with Argus Media this month.

Any strengthening of the U.S. dollar would take time to stem the flow of investment into commodities, and alternative energies such as solar power or biofuels are at least a decade away from contributing to energy supply, Sieminski said.