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Oil Could Fall Below $100 on Demand Drop

Tuesday, 02 Sep 2008 01:33 PM

Oil prices should extend their nearly 30 percent slide and dip into double digits for the first time in five months as the U.S. oil sector seems to have escaped severe damage from Hurricane Gustav, analysts said on Tuesday.

High fuel prices and the wider economic crisis have clipped demand from the United States and other large consumer nations this year, dragging prices from record highs over $147 a barrel to below $108.

Prices had rebounded last week on fears Gustav could cause severe disruptions to U.S. oil operations in the Gulf of Mexico. Early soundings showed little damage to the sector, however, sending oil down again. Analysts said it was now poised to break below $100 for the first time since early April.

"It would take a really major storm to change the direction in crude oil in the midst of its major correction since July, and Gustav is not it," said Chris Jarvis, senior analyst for Caprock Risk Management.

"Could we drop back below $100? Certainly."

Oil demand in the United States, the world's biggest oil consumer, dropped by 800,000 barrels per day (bpd) in the first half of 2008, the steepest volume drop in 26 years.

Some analysts say falling demand from developed economies in the Organization for Economic Co-operation and Development (OECD) could undermine gains from emerging economies like China that have underpinned the six-year rally in oil.

"If that contraction becomes steeper, at some point it's going to be hard to argue there is enough non-OECD growth to offset it," said Mike Wittner, analyst for Societe Generale.

Oil experts have been revising down price forecasts on the basis of weaker demand projections.

Most recently Lehman Brothers this week cut its 2008 forecast for Brent crude, used as a benchmark in Europe, the Middle East and Africa, by $3 to $112 a barrel.

"We are going to get to $100 or below because of the fundamentals," said Simon Wardell of Global Insight, adding that while most of the worst of the global demand losses may have occurred, there was still a threat of the OECD's economic problems affecting emerging economies.

"The outside risk factor is that problems in the West and the OECD spill over into non-OECD market, but I think that would affect the second half of (next) year."

RISING DOLLAR

Further pressure on crude could come from the strengthening of the U.S. dollar against other currencies, after a rush of cash from investors seeking to hedge against inflation and the weak greenback earlier this year helped send crude to new peaks.

"We're at a major inflection point for the dollar which could help to deepen this decline in prices," said Jarvis, adding oil's sharp move would test OPEC's preferred price floor when the producer group meets to decide on output policy.

On Tuesday oil fell below $110 a barrel, a key support level identified by technical analysts who predict future price movements by studying charts. They have said the market could fall as far as around $60 a barrel before the long-term bull trend would be broken and there is strong support at $100.

Iran has said $100 is the lowest acceptable oil price and called for the group to cut output by 1.5 million bpd by early next year.

Fellow price hawk Venezuela has said around $100 a barrel is a fair price, while other OPEC sources have suggested a price floor closer to $80 a barrel because of concerns about the effects of high fuel costs on large consumer economies.

There are fears that prices below that level would discourage investment in new production capacity.

"I think the minimum sustainable price is around $90 a barrel," said Paul Horsnell of Barclays Capital.

"I think (that's) the price where you could see a counterbalance, with production coming off the market."

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Oil prices should extend their nearly 30 percent slide and dip into double digits for the first time in five months as the U.S. oil sector seems to have escaped severe damage from Hurricane Gustav, analysts said on Tuesday.High fuel prices and the wider economic crisis have...
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Tuesday, 02 Sep 2008 01:33 PM
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