Will Oil Drop Back to $20 a Barrel?

Wall Street has yet to show serious concern. That's because the consensus is that oil is not likely to stay at these elevated levels for a sustained period.

Published: 21-Mar-2005

class=intro-copy>NEW YORK — $50 oil has not turned out to be a major depressant on stocks after all. But what about crude at $60 per barrel? $65? $70?

Or how about $80, which would roughly match the inflation-adjusted peak hit in 1981?

Crude, which jumped 32 cents Friday to a record high of $56.72, is flirting with the "Big Six-O."

Until now, stock prices have remained stubbornly solid, despite the fact analysts had much lower crude prices plugged into their stock valuation models at the start of the year.

At some point, logic says super-expensive oil has to make stock prices far lower than they are now. Higher energy costs act like a tax on consumers, crimp corporate profits, and can spur inflation.

Last week, $50-plus oil took a toll on stocks. The Dow Jones industrials fell 1.3% to 10,630, and the Nasdaq composite hit a 2005 low.

Analysts attribute surging oil prices — up about 50% from a year ago and 31% in 2005 alone — to three main drivers: heightened demand, especially from oil-thirsty China; greedy speculators looking to make a quick buck; and a sizable fear premium built into prices due to the prospect of a supply disruption in the volatile Middle East.

Wall Street has yet to show serious concern. That's because the consensus is that oil is not likely to stay at these elevated levels for a sustained period. The economy is less dependent on oil than it was in the 1970s and 1980s, and its ability to absorb higher energy prices without a major slowdown has bolstered investor confidence. "There's a belief that these lofty prices are temporary," says Milton Ezrati, chief investment strategist at Lord Abbett.

The stock market could run into serious turbulence, however, if oil prices continue rising. If oil tops $65 a barrel, Ezrati says, chart watchers would view that as an "upside breakout" for oil, a development that could spook stock market investors. "At $65 to $68 a barrel, the market would start to doubt its optimistic forecast," Ezrati says.

Bruce Bittles, chief investment strategist at Robert W. Baird, says $60 oil will replace $50 oil as the level to watch. "Given that the markets do well when oil is in the $40s and are stonewalled when oil is $50, I think somewhere above $60 the economy and the stock market would really start to suffer."

Brian Belski, fundamental strategist at Piper Jaffray, says most people are overlooking the positives associated with the jump in demand for oil. "It represents a renewed cycle of global economic growth," he says.

Arguing that oil supplies are not as scarce as believed, Nicholas Bohnsack, investment strategist at ISI Group, says crude prices may be poised to fall by $20 a barrel or more from current levels. "Our view is oil goes lower from here."


Visits to China, India, Malaysia and Pakistan are significant because the trip spells out the Saudi Kingdom's Look East policy, representing a new reorientation in its foreign policy that was heavily tilted toward the West.

The worst two scenarios suggest a drastic decline in output to 875,000 barrels a day by the end of 2007 and to just 520,000 a day by the end of 2008.

Bush said he envisioned a future in which a plug-in hybrid car could drive 40 miles on a lithium-ion battery, then stop at a filling station for ethanol, a fuel usually made from corn, similar to HyMotion Prius pictured below.


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