Predicting $25 a Barrel Oil

[jeffrey]

Crude oil may dip below $25 a barrel next year if the recession that’s slashing fuel demand around the world spreads to China, Merrill Lynch & Co. said.

Global oil demand will contract in 2009 as economic growth slows to its weakest since 1982, Merrill Commodity Strategist Francisco Blanch said in a report today. In October, when oil was around $100 a barrel, the bank predicted that prices may slide to $50. Crude traded at $45.30 in New York today, the lowest since February 2005.

“A temporary drop below $25 a barrel is possible if the global recession extends to China and significant non-OPEC cuts are required,” Blanch said. “In the short-run, global oil demand growth will likely take a further beating as banks continue to cut credit to consumers and corporations...

Bloomberg.com: Worldwide

[sweeps]

That would be something. I'm sure OPEC is thrilled.

[Broken Arrow]

Yes, I've read similar reports that oil could slip even further.

Part of the original drive towards record highs for oil was because of growing global demand, including China. However, thanks to the sheer scope of this recession, global demand has dropped... including China.

OPEC is simply faced with customers asking for less and less, and yet, in order to help them recover, they're largely hesitant to cut supplies at this time. Perhaps, as some OPEC members have argued, the low cost of oil can help "stimulate" a quicker recovery.

However, make no mistake that none of the OPEC members actually like this price level. Oil may take a beating along with this recession, but the moment it rebounds? Oil prices is going to go up right along with it.

On the bright side, times like this also represent a great buying opportunity for people who love commodities and energy.

[Investing First Steps]

Oil is always tricky because it is the marginal cost that makes all the difference. Thus the wild swings we're seeing. There's certainly no fundamental reason it can't reach $25/barrel. Demand is almost sure to plummet so if you're speculating, the short side is probably the side to play. Fighting that reality doesn't bear much profit.

Ultimately OPEC doesn't have a ton of incentive to want to push it back up right now, they'd rather make sure that the whole "energy independence/efficiency" notion that was coming in fashion gets forgotten asap.

[kork13]

so apparently gas prices are currently at the same level right now as in March 2004 (Oil at lowest since Dec '04)... the further this goes on, the more strongly I get the nagging feeling that like a rubber band stretched to it's limit, this is going to snap back and hit us in the face.... hard...

::sigh:: pull out the band-aids, this is gonna sting.

[MoneyTrev]

However, make no mistake that none of the OPEC members actually like this price level. Oil may take a beating along with this recession, but the moment it rebounds? Oil prices is going to go up right along with it.

So true. Some people should buy oil and sell it once it hits $100 a barrel! :P

[Tim, Ohio]

How about this theory

The price of oil will stay low as long as OPEC realizes
we are threatening to develop alternative energy
sources that, once in place will reduce demand for
their product. If they keep prices low, it will reduce
our interest in development of these technologies,
or at least slow down our progress. You can already
see that many companies that were set up in the
last three years to produce ethanol and other
alternatives are either in bankruptcy or struggling
to survive since now there is less interest or
profit potential for these companies. Ethanol
factories have been greatly affected. Biofuels,
for intance, is one that may not survive since
only being in business a short time. Could
this be part of the business strategy of OPEC
in the years to come? If prices stay low, we will
forget about the summer of 4.50 per gallon.
The government is now talking about using some
of the funds it set aside for the development of
alternative fuel autos to help save the auto
industry instead of new money. What do you
think?

[brianj]

Temporary low prices may be misleading indicators of future resource scarcity and call into question the future ability of current mega-oilfields to meet a sharp increase in oil demand.

[Investing First Steps]

The price of oil will stay low as long as OPEC realizes
we are threatening to develop alternative energy
sources that, once in place will reduce demand for
their product. If they keep prices low, it will reduce
our interest in development of these technologies,
or at least slow down our progress. You can already
see that many companies that were set up in the
last three years to produce ethanol and other
alternatives are either in bankruptcy or struggling
to survive since now there is less interest or
profit potential for these companies. Ethanol
factories have been greatly affected. Biofuels,
for intance, is one that may not survive since
only being in business a short time. Could
this be part of the business strategy of OPEC
in the years to come? If prices stay low, we will
forget about the summer of 4.50 per gallon.
The government is now talking about using some
of the funds it set aside for the development of
alternative fuel autos to help save the auto
industry instead of new money. What do you
think?

I certainly think Saudi Arabia feels that way. Other producers who are closer to the end of their reserves are more concerned about maximizing their profits in the short term, sadly for them, the Saudis pretty much run the show.