Crude faces uncertain future

Mood now bearish: countries reassessing their price projections after oil dropped 45 per cent.

An oil tanker supplied with oil at the main oil port in Bijaya City some 210km east of Algiers.

One month before an emergency Opec meeting in November to discuss the effects of the world financial crisis and weakening global economy on oil markets, the consensus on future crude prices has turned decidedly bearish. Whole countries are reassessing their oil price projections for the coming year following a 45 per cent plunge in the price of crude since it peaked at US$147.27 a barrel in July. Worries about greatly weakened demand for oil in the US and Europe, combined with the prospect of slower economic growth in Asia, are dominating the deliberations. Russia, the world's biggest combined exporter of oil and gas, on Sunday said it was considering cutting its 2009 forecast for the average price of crude to $90 a barrel from $95, to take account of the faltering world economy. Last week, the US government issued a short-term energy forecast calling for crude prices to average $112 a barrel both this year and the next. The latest US Energy Information Administration projection for next year is down 16 per cent from its July forecast of $133 a barrel. Oil companies, many in the midst of drawing up capital spending budgets for the coming year, are as usual tight-lipped about their inhouse oil price forecasts. But a downwards trend in price assumptions is evident from project delays and cancellations already announced in some high-cost oil-producing regions. In Canada, which produces some of the most expensive oil in the world, Harvest Energy Trust last week said work on a 2 billion Canadian dollar (Dh6.29bn) oil refinery expansion could be delayed by two years until 2010. Canada's Newfoundland and Labrador Refining, meanwhile, has been unable to secure C$5bn in financing it needs to build a new refinery on Canada's east coast. In western Canada, industry plans are in limbo for adding expensive "upgraders" to oil sands projects. Upgraders convert ultra-heavy oil into synthetic crude for processing at standard refineries. The Saudi Arabia Opec governor, Majid al Moneef, warned last week that the global financial crisis was putting investment in downstream energy projects especially at risk. In Canada, problems in the downstream oil processing sector started surfacing in July, when Royal Dutch Shell, citing soaring costs for materials and labour, scrapped plans to build a C$8bn oil refinery at Sarnia, Ontario, the country's petrochemicals heartland. The project, which had massive community support, would have added North America's first new oil refining capacity in more than three decades. A parade of analysts at investment banks have also turned bearish on oil prices. Goldman Sachs, the US bank that earlier warned of US$200 oil, has joined peers that now regard $50 as a more likely near-term price for a barrel of crude. "We have underestimated the depth and duration of the global financial crisis and its implications [for] economic growth and commodity demand," a team of Goldman commodity analysts led by Jeffrey Currie and Giovanni Serio, wrote yesterday in a research report. "Should the financial and evolving economic crisis cut deeper into [oil] demand, the market could fall as low as $50 a barrel," the analysts said. The analysts predicted that $50 oil could become a reality as early as December. The new report represents Goldman's second revision of a March forecast by Arjun Murti, a New York-based equities analyst who predicted a "superspike" in oil prices to between $150 and $200 a barrel. The forecast, issued soon after oil prices had surpassed an unprecedented $100 a barrel, attracted attention as the first by a major financial institution to predict a further surge to $150 a barrel or beyond. Government price hawks in some major oil-exporting countries such as Russia, Iran and Libya, soon predicted a steeper run-up in crude to as much as $250 a barrel. In September, however, Mr Murti cut his projection for the 2009 oil-price average to $110 from $140 a barrel, due to slowing demand. Messrs Currie and Serio yesterday lowered their forecast for next year's average crude price to $86 from $123 a barrel. Earlier this month, Merrill Lynch said oil could sink as low as $50 a barrel next year. "US oil demand is imploding, far outpacing our initial expectations," Merrill analysts wrote. BNP Paribas on Thursday slashed its 2009 oil price forecast by 18 per cent to $95.20. A week earlier, Deutsche Bank said crude had "further downside" and could trade near $80 a barrel in the short term. That threshold was crossed last Friday, when oil dived 10 per cent to close below $80 for the first time in more than a year. Since then, crude has climbed back above $81, recouping part of last week's 17 per cent loss - its biggest weekly drop since the US invaded Iraq in 2003. [e-mail]