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eric reguly

There is a glut of oil analysts on the planet and only an enlightened or lucky few – exceedingly few – predicted the recent plunge in crude oil prices. One analyst who got it more or less right is Olivier Jakob, managing director of Petromatrix, an oil research firm in Zug, Switzerland.

Petromatrix does not offer any financial services; its revenue comes from a single product – a daily newsletter on energy available by subscription. Its clients are oil companies, hedge funds and investment firms. Jakob himself is the editor of the newsletter and has been a trader, risk manager and analyst at various commodities companies.

In the early summer, he turned bearish on oil even as prices for Brent crude, the effective international benchmark, seemed stable at about $110 (U.S.) a barrel. At the time, a good number of analysts and traders were still bullish on oil because Iraq was, and is, under attack by the Islamic States (IS, also called ISIS or ISIL). Their theory was the attacks would inevitably damage production from OPEC's second biggest producer, after Saudi Arabia. Jakob took the opposite view – that broken down, cash-desperate Iraq would pump out as much oil as it could, violence or not – and he was right.

Then, in August, Libya's surprising return to the export market put more downward pressure on prices. In October, when oil was trading close to $90, he said that oil was still southbound and could hit $75 because of the "difficult situation" within OPEC. On Thursday, after another sharp drop, Brent fell to $78 and change and West Texas Intermediate, the American benchmark, went to $75. The price drop has been relentless. In October alone, Brent lost 17 per cent.

Good calls so far by Jakob. So where does he think oil is going from here? Petromatrix doesn't make long-term forecasts, but Jakob remains bearish, though not super bearish, with a short-term call for prices in the $70 to $80 range. "I don't see the case for a strong rebound," he said in an interview.

Two events later this month will give the market a better idea where prices are going. The first, on Nov. 24, is the deadline for Iran to strike a deal to place strict limits on its nuclear program, which it claims is for peaceful purposes. If a deal is struck, the sanctions would be partly or entirely lifted and Iranian oil will splash back onto the international market. It appears, however, that a deadline extension is probable.

The second is the OPEC conference in Vienna on Nov. 27, where the member countries, led by Saudi Arabia, may or may not agree to trim production to support the price. "I'm not sure a lot will happen then unless the price drops another $10 a barrel," Jakob said.

He notes that OPEC is a divided family and reaching an agreement on lower production quotas seems highly unlikely, all the more so since history says the first production cut does not do the trick; several are typically needed and which producing country has the stomach for that?

The OPEC countries are divided because some are far more desperate for oil income than others and will want to keep exports intact, or even boost them. This group includes Iraq and Libya, which are trying to keep their war-shattered economies from total collapse. "With the urgent need of funds to finance the war against ISIS, [Iraq] will not participate in any supply cut," PetroMatrix said in its Nov. 12 newsletter.

Even a couple of OPEC countries with functioning economies, notably Saudi Arabia and the United Arab Emirates (UAE), might argue that production cuts are out of the question because their exports are already falling. That's because both countries are building massive refineries that are soaking up local oil production. Then there is Venezuela, which has rarely been an OPEC team player and will probably argue that it has already done its bit because its net exports are falling as it imports light crude from Algeria to dilute its heavy crude production.

All bets are off, of course, if the sanctions against Iran are lifted.

The other point is that Saudi Arabia has gone through much longer periods of low or extremely low oil prices and survived. Prices at $70 to $80 are still relatively high, suggesting that the Saudis are nowhere near panic mode even though oil is down by almost 30 per cent since June. "There is no sign of pain in Saudi Arabia," Jakob said.

If his analysis is right, betting that prices have bottomed out would be a brave call.