November 24, 2008
Monday

An increasingly dismal outlook for the global economy has sent crude oil prices into a tailspin, and there appears to be little the Organization of Petroleum Exporting Countries can do but slow the fall.

In the most bizarre market since the oil shock of the 1970s, crude shot to a record $147 a barrel just four months ago and has since collapsed, hitting less than $50 in recent days. Some forecasters foresee oil at $30 a barrel.

Crude prices fell nearly 10 per cent to a low of $48.50 a barrel on the New York Mercantile Exchange last week, levels not seen for more than three years.

Many analysts believe the market has overshot the price that current supply and demand would justify. But there is a significant catch.

There appears to be no confidence among investors that projections of demand will hold up under the onslaught of bad news on the world's economy.

"Maybe $50 is conservative given the putrid, putrid look of the economy," independent analyst Stephen Schork said. "If we're not out of the doldrums nine months from now, we're looking at $30 oil."

Just as investors were overly exuberant when prices were climbing to $147 a barrel this spring, they appear to be excessively pessimistic in the current price slump, said Adam Sieminski, chief energy economist at Deutsche Bank AG.

Sieminski said the oil industry is a cyclical industry, but that the highs and lows have been more exaggerated and have occurred with stunning rapidity, making it far more difficult for the industry to adjust.

While the lower prices will discourage investment, many oil companies will continue to generate positive cash flow at $50 prices, said Judith Dwarkin, energy economist with Ross Smith Energy Group.

Most companies have healthy balance sheets from the five-year boom that peaked in July, though it is increasingly difficult to be optimistic about the future in the short term.

"Day by day, forecasters are lowering their forecasts for prices next year and there is just a tremendous amount of uncertainty," Dwarkin said.

The depressed prices will set the stage for the next price spike by driving high-cost supplies -- including biofuels and unconventional sources like oil sands -- from the market. At the same time, low prices could take some of the steam out of consumers' growing preference for smaller, more fuel-efficient vehicles.

As a result, OPEC moderates like Saudi Arabia -- which have vast, relatively low-cost reserves -- are not unhappy to see oil prices fall from their record levels, although the extent of the decline is alarming, Sieminski said.

The oil cartel's ministers are set to meet at the end of this month to discuss further production cuts aimed at stabilizing prices, after agreeing to reduce output by 500,000 barrels a day just last month.

This month, the group cut its forecast of demand growth for the third consecutive month, and noted that some private sector forecasters expect global crude demand to actually fall next year as a result of the slumping economy.

But at the same time, OPEC ministers are wary of cutting too much, which would drive up prices just as the world is grappling with a global recession.

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