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

Posted by: Steve LeVine on September 15

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.