Stephen Gunnion
3 October 2008
Johannesburg — OIL prices continued to fall yesterday, driven by slowing demand and a strengthening dollar.
And Merrill Lynch says that in the "unlikely" event of a global recession the oil price could fall as low as $50 a barrel.
The spot price for Brent crude oil dropped more than $3 to $91,70 a barrel in afternoon trade.
Analysts say they believe prices are likely to remain about where they are now in the short term as the market focuses on subdued demand rather than supply constraints.
Brent crude has fallen 37% from its high of $146 a barrel in early July.
RMB Financial Markets Research said it expected oil to continue to trade in a range of $85-$115 a barrel for six months.
This is in sharp contrast to three months ago, when oil was expected to continue creeping towards $200 a barrel. It also means more cuts in the price of petrol are likely.
"The risks to the downside have increased with the slowing economy," Josina Oliphant, commodities analyst at RMB Financial Markets Research, said yesterday.
"Almost every week we see banks faltering in the US. We have definitely seen a slowdown in demand in the US.
"The lagged impact of recent higher oil prices still has to filter through."
Oliphant said that there had been a change in sentiment since the first half, when low Organisation of Petroleum Exporting Countries (Opec) spare capacity, short-term supply disruptions and dollar weakness boosted oil prices.
The market was now focusing on deteriorating demand in the US, Europe and the UK.
The dollar had also strengthened more than 8% in the third quarter, prompting investors to move funds out of commodities.
In current conditions, said Oliphant, oil was unlikely to move back up to the $150 level in the short term. Although there was a chance of the global economy rebounding next year, she said that it was likely to take longer for the oil price to recover its footing.
Merrill Lynch reported this week that it had halved its oil demand growth estimates for next year, and was lowering its average forecasts for Brent crude from $107 to $90 a barrel.
In the unlikely event of a global recession, said Merrill, oil prices could fall to $50 a barrel.
Merrill said the softer demand for oil was coming from developed and emerging markets.
Car sales in emerging markets such as Brazil and Russia were under pressure, and oil demand from India and China, the two fastest-growing major economies, was also slowing.
While oil demand was on a contracting or decelerating path around the world, Merrill said it expected "substantial growth" in Opec oil production capacity in the next 18 months.
This suggested that Opec would find it increasingly difficult to avert a drop in oil prices next year.
"Moreover, most of the new oil coming on stream is light, suggesting an improvement in product yields," the Merrill analysts said.
However, Merrill said the commodity "super-cycle" was not over.
Instead, the market would become more erratic.
"When economic activity starts to recover, energy demand will likely strengthen and push up prices , as the bank bail-outs will be inflationary in the long term," the Merrill analysts said.
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