Irony at Lehman Brothers: The Stubborn (and Prescient) Ed Morse

Here's one danger of being lionized in one's own lifetime.

Just a few months ago, Goldman Sachs' Arjun Murti, declared "an oracle" for his early prediction of $100 oil, predicted that crude oil prices were headed to $200 a barrel. One financial writer said that detractors of Murti's "superspike theory" of high oil prices would now "eat crow." And when oil reached $147.27 a barrel in July, the soft-spoken Murti was feted day after day.

Today, when oil closed below $100 a barrel for the first time in seven months, at $95.71, Murti looks a lot less far-seeing. His place has been taken by Ed Morse.

The 66-year-old Morse, whom O and G and BW readers heard a lot about in a profile in July, suffered the slights of colleagues in and outside his office at Lehman Brothers while predicting a collapse of oil prices below $100 a barrel based on a different reading of the fundamentals.

Morse said that the market had misread global supply -- where the market saw tightness, Morse saw a growing surplus.

Ironically, Morse has been proven right on the day that his firm declared bankruptcy.

Pushing the issue further, and buttressing Morse's assertions, oil prices may be calibrated a bit differently today. Until now, analysts have focused almost entirely on the tightness of supply -- we're consuming almost the same as what the world's oilfields can produce, so any crisis, like a hurricane for instance, provokes oil analysts and journalists to predict another bout of Murti's superspike.

Yet that isn't what's happened recently. Instead, prices have bumped up a bit, only to fall again once the crisis passed.

Its possible that oil is now in a Wal-Mart age of inventory-on-demand. That is, the market knows that the Saudis, for instance, have a few hundred thousand barrels of spare capacity that they seem willing to switch on and off as the market demands. The same role is played by the U.S. Strategic Petroleum Reserve, which can fulfill a month of American oil demand.

So that the tightness of supply seems less important. And it may take a lot more before Murti's equation again becomes relevant.

Prediction: Sub-$100 Oil

Is the drop in oil prices this week a trend? Will motorists get to stop spending the grocery money to fill their tanks?

One thing is sure and that is that oil prices are in a bubble. I wrote a story on this topic for the issue of Business Week that came out today.

It's a profile on Ed Morse, chief energy economist for Lehman Brothers, who has spent much of the last several months explaining why the year-long runup in oil prices is temporary, and will ease starting in the fall. Next year, he says, the average will be $93 a barrel, which would drop prices at the pump considerably. The on-line version includes a fascinating video of Morse.

Morse's basic argument is that there is no shortage of oil. The market is going to notice a buildup of stored oil around the world starting in the fall. And a plummet in prices will follow.

He makes a convincing case. I myself think that any plunge could end up being a dip, with prices rising again as Chinese and Indian demand go back up. As written previously on O and G, Christophe de Margerie, the chairman of France's Total, seems the most sensible voice on the state of Big Oil.