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View Full Version : Crude price drops close to $40, and analysts say it may go even lower


Ought Six
12-05-2008, 06:15 PM
WHERE DOES OIL SLIDE END? (http://www.chron.com/disp/story.mpl/headline/biz/6148285.html)


Crude price drops close to $40, and analysts say it may go even lower

By KRISTEN HAYS
The Houston Chronicle
Dec. 5, 2008


Just six months ago, the question was how high crude could reach. Now, it's how low can it go?

Oil prices have fallen more than $100 a barrel amid a global recession that has sapped consumption. And economists say the sting will likely last longer than any other recession since World War II.

Now, $40 crude — seemingly unthinkable during its dizzying race into triple digits in the first half of this year — is within reach.

Today, light, sweet crude for January delivery settled at $40.81 a barrel on the New York Mercantile Exchange, down by nearly $3 per barrel. Prices fell as low at $40.50, levels last seen in December 2004.

IHS Global Insight chief economist Nigel Gault said Thursday inflation has vanished alongside oil's plunge. He said crude could hit a trough of $39 a barrel in the second quarter of next year, increasing the threat of deflation — falling prices in tandem with reduced output and higher unemployment.

Tom Kloza, chief oil analyst with the Oil Price Information Service in Wall, N.J., called $40 the new $10, meaning $40 is the bottom now as $10 was the bottom in the last two oil crashes in the mid-1980s and the late 1990s.

But Merrill Lynch's global economic team said in a report Thursday prices could temporarily fall as low as $25 a barrel if the recession spreads to China and the Organization of the Petroleum Exporting Countries doesn't cut enough production at its Dec. 17 meeting.

Overall, the Merrill team lowered its average crude price forecast to $50 a barrel for 2009. The forecast anticipates a trough in the first half of the year as seasonal reductions in driving and other oil consumption further drag down already shrunken demand, followed by a "modest recovery" in the second half.

All eyes on OPEC

The federal government last month slashed its forecast of the average 2009 price to $63.50 from $101.45, also reflecting crude's rapid fall.

In a silver lining for motorists, the price at the pump has followed oil down. A gallon of regular gasoline, which climbed above $4 nationwide in July and approached that figure in Houston, averaged $1.79 nationally and $1.65 in Houston on Thursday, AAA reported.

James Williams, head of WTRG Economics, an Arkansas-based energy consulting firm, said a further drop in oil prices to $25 to $30 a barrel is reasonable if OPEC doesn't impose and comply with more aggressive cuts.

The onus is on OPEC to balance the market because the recession likely already has spread to China, he said, lowering demand in the world's most populous nation. Its thirst for fuel contributed to the price run-up over the past four years.

"Factories are closing," Williams said. "Housing is overbuilt in many areas. And the government is going to fund infrastructure projects to increase employment" with the $580 billion-plus stimulus package announced a month ago.

"That kind of sounds like the U.S., doesn't it?" he said.

In October, when crude was above $60, OPEC said it would shrink output by 1.5 million barrels a day. Output actually was down about 1.2 million barrels when the cartel met last Saturday in Cairo, and said it would decide on additional cuts at the Dec. 17 meeting.

But consumption is down by 1.27 million barrels in the U.S. alone, Williams noted. He said OPEC will have to cut more to compensate for shrunken demand elsewhere as well as seasonally low demand in January and February. Such cuts would slow crude's slide, if accompanied by a cold winter pushing up demand for heating oil.

"If they cut another 3 million barrels by March, they have a chance of maintaining the current price or maybe even as much as $50," Williams said.

Michael Lynch, president of Winchester, Mass.-based Strategic Energy and Economic Research, also said crude could fall as low as $25 "at least briefly," but OPEC is likely to cut production enough to ratchet prices back up to $50 by the end of the first quarter of next year.

"After three months, the market will be more or less balanced," he said.

UH prof weighs in

Michael Economides, an oil expert and chemical engineering professor at the University of Houston, said oil's dance with low double digits will end when the recession eases. As the economy rebounds, so will oil demand.

And when it does, supply will be tight because the industry is scaling back on expansions and new projects until economic conditions improve. That means triple-digit oil could make a comeback in as little as 18 months, depending on the speed of the economic recovery, Economides said.

"I think the price of oil will surpass $150 before too long."
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Ross
12-05-2008, 06:33 PM
Given the recent history of analysts predicting oil prices I no longer believe
a word they say.

Ought Six
12-05-2008, 06:53 PM
Economists are the only people who can be wrong more often than weathermen, and still keep their jobs.

leistb
12-05-2008, 07:05 PM
Economists are the only people who can be wrong more often than weathermen, and still keep their jobs.

You forgot politicians... :D

BirdGuano
12-06-2008, 01:52 PM
Enjoy cheap oil while you can.

These ARE the good old days.

Fiddlerdave
12-06-2008, 03:23 PM
Once there is time to adjust drilling, manufacturing and supply to demand, the prices of oil, cars, and almost everything else will go up.

Enjoy the overstock deals while they last.

Ought Six
12-06-2008, 07:23 PM
You guys have, as they say, 'a firm grasp of the obvious'. :D

BirdGuano
12-07-2008, 04:25 PM
You guys have, as they say, 'a firm grasp of the obvious'. :D

I'm thinking of going on meandering Sunday drives in my SUV and videotaping them.

Just so I have something to remember in 5 years.

:rocking: