As the recession takes hold and increasingly looks to be a nasty affair, analysts are quickly revising forecasts to levels that would have seemed barmy a mere month ago. The latest is a new Merrill call that oil could drop to $50 a barrel, although the report waffles hugely by deeming a global recession “unlikely”. Have the authors not been reading the news, or is it house policy to underplay mention of how bad things look likely to get?
From Bloomberg (hat tip reader Michael):
Crude-oil prices may fall as low as $50 a barrel next year, about half current levels, in the “unlikely” event of a global recession, weighing on shares of petroleum producers, Merrill Lynch & Co. said.
Such a scenario, where global growth in Gross Domestic Product falls to 1.5 percent, isn’t the base-case forecast, the bank said today in a report. Merrill cut its 2009 average price estimate for West Texas Intermediate, the U.S. benchmark oil grade, by 16 percent to $90, citing falling demand and the start of new fields in Organization of Petroleum Exporting Countries…. U.S. oil use is declining faster than expected, while European consumption is falling “rapidly,” and OPEC production capacity is “just about to soar,” Merrill said.
“Combined, these factors represent significant short-term headwinds for both upstream and downstream companies alike,” Merrill analysts Mark Hume and Alexis Clark said in the report. “Notionally it is conceivable that in a worst-case scenario global oil demand actually contracts in the near-term as it did back in the 1980s post the Iranian Revolution.”
Yves here. Demand then didn’t just fall, it fell by about 1/6.
Oil demand growth in China and India, the world’s fastest- expanding major economies, may slow down in 2009, Merrill said….
“Against our initial expectations, some of the emerging markets are not keeping up either,” the Merrill analysts said.,,,
A “string” of fields in Saudi Arabia, Qatar and elsewhere within OPEC is set to increase capacity within the exporting group by about 3 million barrels a day in the next 18 months, the analysts said. In addition, refinery expansions and new projects will add about 900,000 barrels a day of distillate and 700,000 barrels a day of gasoline production capacity, they estimate.
The long-term cycle for oil prices “remains intact” because of under-investment in the industry, the Merrill analysts, based in Sydney and Melbourne, said.