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Section: Daily Dispatches

Commodity Strategists: Tice's Auerback Sees $80 Oil

By Sri Jegarajah
Bloomberg News Service
Monday, May 9, 2005

SINGAPORE -- Crude oil prices may rise as high as $80 a barrel as
recoverable reserves dwindle, making it harder for producers to meet
growing global demand, said Marshall Auerback, an international
portfolio strategist.

"There quite simply are not enough new big oil projects coming on
stream anymore to replace the old oil fields that are running low,"
said Auerback, 45, in an interview on May 6. "By 2009 or 2010 the
whole energy complex will be substantially higher because there is
no cheap alternative to fossil fuel. Down the road we could get to
$70 or $80 a barrel."

Growth in oil consumption has outpaced newly-discovered reserves for
nearly a quarter of a century, said Auerback, who manages $450
million in stocks and bonds at U.S. Virgin Islands- based investment
adviser David W. Tice & Associates.

Speculation that demand will outpace supply helped push oil on the
New York Mercantile Exchange to a record of $58.28 a barrel on April
4. Oil for June delivery rose as much as 53 cents to $51.49 a barrel
in after-hours trading. Oil traded at $51.32 a barrel, 0.7 percent
higher, at 2:25 p.m. Singapore time.

Prices have also gained on concern that spare capacity held by
producers including OPEC member-states may not be enough to cover
supply disruptions caused by sabotage, labor or civil unrest in
producers including Iraq, Venezuela and Nigeria.

World oil demand will rise 2.1 percent this year, with most of the
increase in China and the U.S., the International Energy Agency, an
adviser to 26 industrialized nations, said April 12. Daily demand
will peak in the fourth quarter at 86.1 million barrels, the Paris-
based agency said.

In 2003 when New York oil futures averaged $30.99 a barrel, Auerback
forecast oil would touch $40 a barrel in 2004 and rise to $50 the
same year. Prices averaged $41.47 in 2004 and surged through $50 a
barrel to touch $55.67, the highest since oil futures started
trading in New York in 1983. Prices then rose to a record $58.28 on
April 4.

Saudi Arabia, the world's biggest oil exporter, increased output by
110,000 barrels, or 1.2 percent, to 9.45 million barrels a day in
April, according to a survey by Bloomberg on May 3. The country has
capacity to pump another 1.5 million barrels a day, Saudi Arabian
oil minister Ali al-Naimi said on April 21.

"Most of the major oil-producing nations are close to full
production capacity, notably Saudi Arabia," Auerback said. "In spite
of current pledges to increase production and investment in
infrastructure further, the Saudis probably are unable to raise
their output significantly over the next 20 years."

Auerback's remarks support arguments made by Matthew Simmons,
chairman of Houston-based energy investment bank Simmons & Co., and
Boone Pickens, a Dallas hedge fund manager and former oil company

Pickens, who said last month "finding new oil is a tough business,"
has predicted crude oil prices will finish this year above $60 a
barrel as demand outstrips supply. Simmons, a member of the board at
Oklahoma City-based oil producer Kerr-McGee Corp., said in March
that oil prices will probably top $100 a barrel as production costs
rise to drill in harder-to-reach places to meet soaring worldwide

On March 31, Goldman Sachs Group Inc. analysts led by Arjun Murti
said oil may climb as high as $105 a barrel in the next several
years as the market enters a "super spike" period spurred by rising
demand. The firm's upper limit was previously $80.

The extra oil that producers can pump has "decreased to dangerously
low levels," Merrill Lynch & Co. strategist Francisco Blanch said in
a report last week. Blach said he expects crude oil will probably
stay above $50 a barrel in New York through the end of the year
because a lack of investment has left the industry without spare

OPEC's crude-oil production in April rose 0.9 percent to 30.07
million barrels a day, close to a 26-year high, a Bloomberg survey

Including Iraq, which is not restricted by a quota, the group
produced 30.1 million barrels a day last month, according to the
survey of oil companies, producers and analysts. In October, OPEC
pumped 30.54 million barrels a day, the highest since 1979, based on
U.S. Energy Department records.

"I agree with the Merrill Lynch view," Auerback said. "I don't
envisage a spike as such in the oil markets. I would prefer to view
it as a case in which the era of cheap oil is over, as depletion
dynamics increase."

OPEC has no more than 1 million to 2 million barrels a day that
could be pumped, Algerian Oil Minister Chakib Khelil said on April

Between 1999 and 2003, new discoveries of oil and condensates
accounted for about 62 billion barrels, which replaced 46 percent of
production during the five-year period, according to Institut
Francais du Petrole, an independent industrial research center based
in Rueil-Malmaison, near Paris.

"I ultimately think we're going to go a lot higher," Auerback
said. "The global economy today now uses more than four barrels of
oil for every new one discovered."


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