Forecasts for oil prices depend on economic outlook

Bob Tippee
Editor

Guess the question from the answer: It all depends on the global economy.

If you work in the oil and gas business, you haven't been paying attention to developments around you if you didn't respond with this: When will oil prices quit falling?

Marker crude prices dropped below $40/bbl this week after two developments that normally would strengthen oil values.

In the first of those developments, the Organization of Petroleum Exporting Countries announced its biggest production cut ever.

If fully implemented, the action would remove enough oil from the market to avert a catastrophic inventory build.

But OPEC members seldom implement production cuts fully. That partly explains why crude prices fell after OPEC's announcement.

In the other development that normally might boost crude prices, the US Federal Reserve cut the interest rate on interbank loans to almost nothing. The dollar's value plunged. Buying a barrel of oil should require more dollars than before. But oil prices still fell.

The oil market, at the expense of everything else, seems focused on demand and its relationship to the global economy. Rightly so. The economy looks grim.

Indeed, assumptions about economic growth drive predictions for average oil demand in 2009.

Three important forecasting entities differ interestingly in predictions published in December. The International Energy Agency sees a slight gain in average 2009 demand for oil, to 86.3 million b/d.

The US Energy Information Administration and OPEC both see slight declines. The lower of those two forecasts is EIA's: 85.3 million b/d.

That larger-than-usual 1 million b/d difference reflects the uncertainty now terrorizing traders.

It largely results from divergent assumptions for economic growth: 2.1% for IEA, which uses the International Monetary Fund's projection; 0.5% for EIA; and 1.5% for OPEC.

IEA points out, "Should the recession prove to be more prolonged than expected, this [demand] prognosis could be further revised down."

The obverse, though, is worth considering: With supply limits in place and the dollar down, early economic recovery—unexpected, yes, but not out of the question—would jerk oil prices back up quicker and by more than anyone now thinks possible.

This feature will appear next on Jan. 2, 2009.

(Online Dec. 19, 2008; author's e-mail: bobt@ogjonline.com)

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