Wise Kuwait forecaster tips $60 oil amid W-shaped economic recovery

So great have the hopes for a strong economic recovery become on Wall Street that it has become a reality in terms of share prices long before any tangible evidence that it is actually happening.

US housing sales are in their worst slump in six decades, so too are US car sales and orders for new commercial aircraft have crashed by two-thirds. The signs of an upturn are mainly a statistical illusion pumped up by bullish commentators.

$60 oil forecast

It is therefore wise of Kuwait Supreme Petroleum Council member Emad Al Atiqi to tell news agencies that $60 oil is on the cards because the rally in oil prices above $85 a barrel recently is unsustainable.

‘As long as the financial crisis in the US and Europe is not resolved and banks have not cleared up their balance sheets, I don’t see this crisis recovering soon,’ he said. It will mean W-shaped recovery and that will be reflected in future oil prices. Oil prices will likely dip as the recovery dips and I see oil prices at $60 a barrel.’

It is true that oil markets presently reflect a hope about a recovery and not an actual recovery. There is no shortage of oil in global markets to justify high prices that seem almost entirely driven by speculation in financial futures markets.

When the reality dawns on investors, or rather when something forces them to face up to reality then the return to a lower price level will be swift. For the necessary extra force to convert a highly tentative economic recovery into a nice V-shape is just missing right now, indeed all the forces are about to swing to the contrary direction creating a W-shaped or double dip recession.

Unsustainable deficits

We know that massive global stimulus programs around the world have brought the world economy back from the brink of the abyss. But we also know that this is fundamentally unsustainable. Anybody knows that you cannot borrow more than you earn indefinitely. Money has to be paid back one way or another.

Thus the US has to address its deficit and China has to reign back its spending binge. This is now happening. The $8,000 tax break on new home sales in the US ends this month. The Chinese are clamping down on new bank loans. Greece might have a bailout but it also gets an austerity package. Who is next? The UK, Italy, Spain, Portugal, all have clearly unsustainable deficits.

Mr Atiqi is right to highlight this reality. But even at $60 a barrel oil provides a very comfortable cash flow into the Gulf Cooperation Countries that will allow them to maintain higher levels of growth than in the industrialized world. It will just be a lot slower than the GCC has been used to recently.