In March 2008, following a doubling in oil prices in the previous 12-month period, Deutsche Bank examined at what point oil prices could be considered extreme. "We presented a variety of indicators such as oil prices as a share of global GDP," says Adam E. Sieminski, chief energy economist at Washington, D.C.-based Deutsche Bank, Global Markets Commodities Research. "We estimated that oil would be expensive at $130 to $145 per barrel, and found that the oil price would need to surpass $150 per barrell for it to represent levels of valuation which had never been reached in recorded history. "We are reversing the analysis, to assess how low commodity prices, and specifically crude oil prices, can fall. We believe the deepening banking sector crisis and the significant slowdown in global growth that lies ahead will continue to put downward pressure on commodity prices most notably in the energy and industrial metals sectors. "We find that crude oil is the most richly priced commodity currently. We find oil prices would need to fall to $35 per barrel in order to bring prices in real terms back to their long run historical averages. However, we believe that important changes in the market, especially the geographic location of marginal demand and supply, suggest that $60 per barrel represents a more realistic characterisation of 'cheap' oil. Before that happens we expect OPEC will cut production to defend the oil price. We expect this will provide temporary support to oil prices, but, we expect aggressive production cuts will be necessary given the risk world GDP growth falls below 2% in 2009." How low can oil prices go? Indicator, Oil price level Budget balance $55-95 Marginal cost of production $80 Based on futures forecasting error $80 As a share of S&P500 $60-90 As a percent of US disposable income $60-85 As a percent of global GDP $40-75 Relative to G7 per capita income $45 Versus US dollar $30-60 In real terms (PPI) $35 Average $61
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