Oil prices are likely to keep falling until well into next year and could reach $25 a barrel before recovering, U.S. bank Merrill Lynch has said.
In a research report published on Thursday, it said oil prices should begin to rally in the second half of 2009.
Merrill Lynch recently cut its forecast for the average price of U.S. crude oil futures and North Sea Brent crude oil to $50 a barrel from a previous estimate for both crudes of $90.
"With demand vanishing across all key oil consuming regions, benchmark crude oil prices continue to plummet," it said. "In the short-run, market participants will focus on both OPEC and perhaps even non-OPEC producer responses to balance the market."
"A temporary drop below $25 is possible if the global recession extends to China and significant non-OPEC production cuts are required," it said.
"In our view, oil prices could find a trough at the end of Q1 2009 or early Q2 2009 with the seasonal slowdown in demand. Then, as economic activity starts to strengthen, we see oil prices posting a modest recovery in the second half of 2009."
Oil prices hit a peak above $147 a barrel in July but have fallen more than $100 since then as the severity of the global economic downturn has become clear.
Merrill Lynch said a combination of high oil prices and high leverage had proven dangerous for the global economy.
"On October 1, we lowered our average crude oil price forecast in 2009 to $90 per barrel based on a global GDP growth forecast of 3 percent. Since then, our economists have revised their 2009 global GDP growth forecast down to 1.3 percent, a scenario consistent with a global recession.
"As a result, we are now lowering our average WTI and Brent crude oil price forecast to $50 per barrel for 2009."
It said the major downside risk to its price forecast would be a revision of economic growth assumptions for China, which are currently at 8.6 percent for next year.
"In the short-run, global oil demand growth will likely take a further beating as banks continue to cut credit to consumers and corporations," it said. "We now expect an outright contraction in global oil demand in 2009."
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