Analysts Forecast Oil Prices to Rise in 2009

FRANKFURT (Dow Jones Newswires), December 10, 2008

Oil prices may increase in the course of 2009, despite the recession and the ongoing financial market crisis, analysts say.

While demand destruction may continue, especially in emerging markets, some analysts say the recent extreme price slump has been exaggerated, allowing for a possible rally.

Oil supply is also expected to shrink with many oil producers abandoning expensive and unprofitable production projects, the analysts say.

In a survey conducted by Dow Jones Newswires in mid-November, analysts forecast an average price of $70 for Brent crude over 2009, which would mean an increase of around 60% on the current price.

For light sweet crude, analysts forecast a price of $72.80 - an increase of more than 40% on the current price.

John Coyle, a fund manager at Schroders, expects a tighter supply with oil production becoming more and more expensive. "Many production projects are profitable only from $80 to $90," he said.

A possible production cut by the Organization of Petroleum Exporting Countries, or OPEC, on Dec. 17 should also support prices, he said.

"If the winter is cold, prices could rise significantly already in January," Coyle said. He also said that leading signs of a recovering global economy would also result in a quick oil price increase.

Coyle said he wouldn't be surprised if oil prices reached the $100 level in the coming 18 months.

Some analysts say the current price drop has been compounded by financial problems at hedge funds. Redemptions have forced funds to liquidate commodity holdings forcing prices down in an already depressed market.

"If the extreme volatility of the oil price isn't based on fundamental reasons alone, but also on changes in investors' willingness to take risk, then an oil price rally is quite imaginable at current prices," Coyle said.

Other analysts are less bullish, however, pointing to economic contraction and shrinking demand in important markets.

"Whenever industrial production rose by less than 2%, raw material prices fell in the following six months," said an analyst at Credit Suisse, who expects industrial production to continue falling until April 2009. "Raw material prices shouldn't rise sustainably, at least not until mid-2009," he said.

Demand for oil -- in particular from the U.S., China and emerging markets -- is weakening, many analysts say.

China and the emerging markets have been the key drivers of the oil price surge, thanks to their booming economies, but the biggest oil consumer is still the U.S. where, according to Credit Suisse, demand slumped 9% in November, compared to the same period last year.

The demand fall meant producers had to store the oil and this filled up their storage capacity. "Whenever the unused capacities of OPEC exceed 5%, their pricing scope is more restricted," the analyst said, adding that a falling oil price would be the result.

Jan Stuart of UBS doesn't rule out oil prices falling to $30. "The economy could develop worse than expected," he said. In this scenario, the price would fall to the level of operating production costs, about $30 a barrel for big oil companies.  

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