Analysts believe bottom of crude oil price may be $ 40/bbl

Oct 27, 2008 01:00 AM

Crude oil prices could possibly fall to as low as $ 40/bbl, and as crude continues to lose value it may soon be oversold, Deutsche Bank chief energy analyst Adam Sieminski told an audience at a Washington think-tank.
"Just as we overshot with $ 140/bbl oil, we could undershoot with oil at $ 40/bbl," Sieminski told attendees at the Johns Hopkins SAIS Global Energy and Environment Initiative.

Crude oil prices are down more than 50 % since reaching an intraday record high of $ 147.27/bbl on July 11. NYMEX December oil futures fell as low as $ 61.30/bbl, before rebounding to settle $ 63.22/bbl. Brent crude futures on ICE fell as low as $ 59.02/bbl.
Sieminski said that as crude oil prices fall, it may be time for the US government to start buying oil to build up the Strategic Petroleum Reserve (SPR), which currently stands at about 700 mm barrels, but has a capacity of 727 mm barrels and is scheduled to be expanded to 1 bn barrels.

"We should have been selling oil at $ 100 [per barrel], now we should be buying it at $ 50 (per barrel)," Sieminski said.
The SPR has also sold or loaned about 5.4 mm barrels of crude oil as a result of supply disruptions resulting from hurricanes Gustav and Ike, both making landfall in September. Congress in June forced President Bush to stop filling the SPR at a rate of about 70,000 bpd, suggesting that the royalty-in-kind program which took crude oil in lieu of royalty payments for drilling on federal land, was contributing to soaring crude prices.

Falling oil prices may also create a dilemma for Democratic presidential nominee Barack Obama, Sieminski said, as Obama has called for a 70 mm-barrel "swap" of light sweet crude oil from the reserve as a way to lower oil prices. A sale could boost net revenue for the federal government by about $ 750 mm, according to a similar measure proposed earlier this year by Representative Nick Lampson, a Democrat from Texas.
"We need to grow the reserve, not shrink it," Sieminski said.

Already falling oil prices have forced the Obama campaign to relent on a plan to implement a windfall profits tax on oil company profits when crude oil prices are over $ 80/bbl. A senior Obama campaign aide said on October 23 that the tax would only be implemented when oil prices are above $ 80/bbl. With oil currently trading in the mid-$ 60-$ 70/b range, the tax would not kick in.
The tax plan was expected to raise $ 65 bn over five years, the campaign said.

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