(The following is an excerpt from CNBC's Kudlow & Company last night with oil analyst Michael Lynch, President of Strategic Energy & Economic Research. Some interesting ideas here...)KUDLOW: We were talking earlier about how markets work. When prices skyrocket as they have, it affects supply, it affects demand and eventually goes back and affects prices. Is your analysis based on the workings of the marketplace?
Mr. MICHAEL LYNCH: Yes, almost exclusively. You know, the fundamentals have really shifted. They've become a lot more bearish over the past year. The geopolitical situation is improving so you've got to expect prices to come down.
KUDLOW: We might play ball with Iran at least in so far as some greater diplomacy efforts and maybe a little bit less saber-rattling. Look, I'm a hawk on Mahmoud Ahmadinejad. I don't like the guy. I don't like the nuclear weapons program. But it looks like at the margins, there's a little bit more opportunity for discussion and maybe a little less threat of war. Is that what you're thinking about?
Mr. LYNCH: Yes, it's been nine months or so of concern about this, and nothing's happened to the oil supply. I think traders realize that it's going to be--in the worst case, it's going to be months before anything really happens.
KUDLOW: Did the oil inventory as it came out today have any impact? Now crude oil inventories are just about as high as they were back, seven, eight years ago in 1998. Gasoline inventories are not quite as strong but still strong. Does the inventory data affect--influence your price forecast?
Mr. LYNCH: Yes, it does. Especially--not just the US inventory but the OECD inventory data, which is showing that inventories are approaching the record levels we saw back 10 years ago in 1998 when the price collapsed to $12.
KUDLOW: Is it possible that ethanol-related gasoline, which was a big problem, we couldn't deliver the stuff when the mandate went into place last winter and spring--is that getting to the gas stations better? Is the transportation better? Is that one of the factors helping the gas price story?
Mr. LYNCH: That's definitely one of the factors. It's also--we've ended the summer driving season, and so refiners no longer have to have the ultra-clean gasoline, which requires more ethanol, so that's also helped the market. But you know, ethanol supplies--it's a lot easier to build an ethanol plant than it is to build a refinery, so that's catching up.
KUDLOW: Now if I were a nattering nabob of oil pessimism, which I am not, but I'm going to play devil's advocate, if I were, I would say to you that led by Saudi Arabia, OPEC is going to screw all of us by somehow cutting back production and getting the price back to $70. How do you respond to that?
Mr. LYNCH: Well, in theory, they've got a lot of influence and power, not complete control, but I don't think the Saudis want $70. I think they're worried that their market is going to collapse just like it did back in the early '80s, and you're seeing some signs of that. There are a lot of people who think that over the next few years, OPEC production is going to have to decline just to balance the market.
KUDLOW: And, Michael, you're down there, as I recall, at $45. That's your estimate. Let me just ask you how you get there, and I'm going to bring my panelists back in to comment and either agree or disagree. Why not $30 or why not $55 or $60? How do you get to $45?
Mr. LYNCH: Well, I think the main reason is that although the fundamentals are weak, we still have a bit of geopolitical concern. Something might happen in Nigeria or Iran, and that keeps the traders worried and gives you some bullish pressure. But also, you know, OPEC will cut back as the price goes down, depending on how quickly it drops and where it is, and I think by the time you get to $50, the Saudis especially are going to be cutting back.
