Gluskin sheff’s David Rosenberg takes bearish view on crude oil pricing

Oil prices in the US$100-perbarrel range appeared to be the new normal for much of the past few years.

Driven primarily by Chinese growth in the double digits, investors and consumers seemed to think pricing risks were skewed to the upside. But the trend in China’s real GDP growth has fallen closer to 7%, and many economists are forecasting it will fall even lower to a rate of 5.5% in the coming years.

“The demographics are daunting as is the need to resolve a massive debt burden,” said David Rosenberg.

Gluskin Sheff + Associates Inc.’s chief economist noted U.S. shale gas producers seem to be coping with the recent pullback in energy prices, as they show no signs of cutting back output. At the same time, he pointed out OPEC has become very aggressive in efforts to recapture lost market share.

We may never see oil in the US$20 to US$40 range that it traded in for several decades prior to 2004. But Mr. Rosenberg also noted that very few ever expected prices would be around US$100 for more than a decade.

“Even in real or inflationadjusted terms, the oil price is far above the norms of past decades,” he said.

More fundamentally, Mr. Rosenberg noted the rule of supply and demand suggests prices will inevitably gravitate to the marginal cost curve of the lowest producer. In the case of oil, that remains Saudi Arabia at somewhere near US$20 per barrel.