Will oil prices sink to US$50 a barrel as global recession sets in next year?

03-Nov-08

Weakening demand and continuous build up of oil stocks has undone most of the previous price predictions. Merrill Lynch has revised its earlier forecast of US$107/barrel of oil in Q4, to US$78/barrel, adding that a global recession next year could plummet oil prices to US$50 a barrel. As US oil stocks continue to build in the coming months, the contango in term structure of WTI crude oil prices could become much more pronounced, following the weaker timespreads observed in the European Brent markets. With stocks around cushing starting to build, oil timespreads could weaken very rapidly," as per the report by Merrill Lynch. Merrill Lynch said as oil stocks continue to enhance, volatility will drop. "The build-up of crude oil inventories should help create the cushion to absorb crude oil supply and demand stocks, reducing price volatility. Volatility is likely to come down after the macro picture is clearer and Opec's response to the new demand environment has been properly signaled. We should see a strong flattening of implied volatility firm structure, which is now trading at a strong degree of backwardation. The commodities research wing of Standard Chartered has predicted oil prices will stand at US$80 a barrel in H1-09 and will edge up to US$$85 a barrel in H2. PFC energy, an energy analysis firm recently predicted an oil price of US$90 a barrel. J.P. Morgan forecasts that oil prices will average US$79 a barrel in Q4-08 and about US$70 a barrel in early part of 2009.