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Oil May Fall $50/Bbl in Global Recession -ML

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    Charles Randall

    Oil May Fall to $50 in Global Recession, Merrill Says (Update2)

    By Angela Macdonald-Smith
         Oct. 2, 2008 (Bloomberg)
    Crude-oil prices may fall as low as
    $50 a barrel next year, about half current levels, in the
    “unlikely” event of a global recession, weighing on shares of
    petroleum producers
    , Merrill Lynch & Co. said.
         Such a scenario, where global growth in Gross Domestic
    Product falls to 1.5 percent, isn’t the base-case forecast, the
    bank said today in a report. Merrill cut its 2009 average price
    estimate for West Texas Intermediate, the U.S. benchmark oil
    grade, by 16 percent to $90,
    citing falling demand and the start
    of new fields in Organization of Petroleum Exporting Countries.
         Crude-oil future prices have fallen almost a third in New
    York since reaching a record $147.27 a barrel on July 11, driven
    by concerns a worsening financial crisis in the U.S. is crimping
    energy demand. U.S. oil use is declining faster than expected
    while European consumption is falling “rapidly,” and OPEC
    production capacity is “just about to soar,” Merrill said.
         “Combined, these factors represent significant short-term
    headwinds for both upstream and downstream companies alike,”
    Merrill analysts Mark Hume and Alexis Clark said in the report.
    “Notionally it is conceivable that in a worst-case scenario
    global oil demand actually contracts in the near-term as it did
    back in the 1980s post the Iranian Revolution.”
         Oil demand growth in China and India, the world’s fastest-
    expanding major economies, may slow down in 2009
    , Merrill said.

                            China, India

         China’s crude-oil demand may rise by about 270,000 barrels
    a day, or about 3.4 percent, while India may consume 40,000
    barrels, or 1.4 percent, more crude a day in 2009
    , the bank
    said. India’s crude-oil use last year rose by 6.7 percent to
    2.74 million barrels a day and consumption in China climbed 4.1
    percent to 7.85 million, according to BP Plc’s Statistical
    Review of World Energy 2008.
         “Against our initial expectations, some of the emerging
    markets are not keeping up either,” the Merrill analysts said.
          A decline in prices to $50 would impede investment
    decisions on projects
    , said Anthony Nunan, assistant general
    manager for risk management at Mitsubishi Corp. in Tokyo.
         “You’re already seeing some delays because of the credit
    issues now,” Nunan said. “Longer-term, this is bullish
    because it adds to the already chronic supply problem.”
         Crude oil for November delivery today gained as much as
    1.9 percent to $100.37 a barrel in New York as the U.S. Senate
    passed a $700 billion financial-rescue package aimed at
    limiting the slowdown of economic growth in the world’s biggest
    energy-consuming nation.

                              OPEC Capacity

         A “string” of fields in Saudi Arabia, Qatar and
    elsewhere within OPEC is set to increase capacity within the
    exporting group by about 3 million barrels a day in the next 18
    months, the analysts said
    . In addition, refinery expansions and
    new projects will add about 900,000 barrels a day of distillate
    and 700,000 barrels a day of gasoline production capacity, they
         The long-term cycle for oil prices “remains intact”
    because of under-investment in the industry, the Merrill
    analysts, based in Sydney and Melbourne, said.
         “We argue that structural under-investment in the energy
    sector remains a key concern and once the economy re-emerges
    from its current decelerating trend, energy demand will likely
    start to strengthen and place upward pressure on prices that
    could structurally break above $150 a barrel as economic
    activity recovers,” Merrill said.
         The revised 2009 price forecasts are 20 percent lower than
    market consensus and 10 percent below forward prices,
    said. Preferred investments in the industry are “quality
    names” that offer “solid valuation, visible catalysts and
    minimal oil-price exposure,” it said, reiterating its “buy”
    recommendations on Oil Search Ltd. and Santos Ltd. among
    Australia-listed stocks.


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