Crude punches below $50/barrel as pessimistic news continues to roll in

China (Platts) -- Nov 19 - 25, 2008

By reporters at Platts, the energy information division of the McGraw-Hill Companies. For more information about Platts' information products in China, contact Platts at china@platts.com, or call its representative office in Guangzhou at (+86) 20 2881 6588.

Benchmark WTI crude oil prices punched through the psychologically significant $50 barrier during the last week, touching an almost two-year low of $48.71/barrel last Thursday (November 20), but prices quickly bobbed back above $50, settling at $53.51/barrel by Monday, November 24.

When the Asian markets opened on Tuesday, front-month WTI was trading at $54.25/barrel.

Prices were last seen at $50/barrel on January 18, 2007.

How far is down?

Crude's inexorable descent has left market participants pondering exactly where the market bottom may lie.

"Most industry participants expect crude prices to recover within the next two years, but the open question is what level will we see, and when will we see it, before prices start to rise again," an industry watcher said Monday on the sidelines of the Platts-Reuters China Oil Seminar in Beijing.

A consensus seems to be emerging that $40/barrel may be a realistic bottom, based on an informal survey of market participants.

Regardless of how low prices will finally sink before they recover, another point of debate that emerged at the conference was the nature of the recovery trend.

"Will this be a 'V' trend, where prices bounce back after hitting a significant bottom, or a 'U' trend in which the market goes through a protracted period of low prices before recovering again?" another delegate said.

Opinion tended to favor the latter scenario, but the timing, price level and shape of the recovery will depend largely on demand-side factors, i.e., the global economic outlook.

In today's demand-driven market, recent moves by OPEC producers to bolster prices by cutting output have been largely ignored by the market.

For now, the perceived state of the economy is the biggest driver of prices.

Recovery within 18 months?

Although opinion remains divided on exactly how long the global economic slump will last, world leaders put on a brave face and spoke in voice over the weekend as they gathered for the 16th Asia-Pacific Economic Cooperation (APEC) forum in Lima.

US President Bush, as well as Chinese President Hu Jintao and other world leaders from across Asia, said in a joint statement published Sunday, "we are convinced that we can overcome this crisis in a period of 18 months. We have taken urgent and extraordinary steps to stabilize our financial sectors and strengthen economic growth."

The estimate of one and a half years is consistent with the outlook from many think tanks of one-to-two years.

The International Monetary Fund, for example, said in its most recent forecast published in October, that global economic growth would likely slow from about 5% last year to roughly 4% this year and then hit a trough of 3% next year after recovery to 4.2% in 2010 and then peaking at about 4.8% from 2011 through 2013.

If energy prices continue to track GDP growth rates as they have in recent years, then the industry could possibly see a recovery in prices again from late 2009 or early 2010.

Demand dominates, but supply-side factors enter the long-term picture

While the focus of much discussion about prices remains squarely on the economy, concerns over a possible supply bottleneck in the long term continued to be voiced this week.

The International Energy Agency's chief economist, Fatih Birol, said November 24 that the worldwide credit crunch is imperiling upstream energy projects around the globe, which could lead to soaring energy prices in a few years as the world economy recovers.

Birol, speaking at the Center for Strategic and International Studies in Washington, said that while global energy demand is expected to increase during the next several years, lower than expected prices for crude oil, along with an inability to obtain financing, may hurt future expansion of critical energy-related infrastructure.

"We hear almost every day, an upstream project cancelled, delayed or deferred because of the low prices or (lack of financing)," Birol said. "If the economy rebounds next year, and we hope it will, we may be unprepared if those investments don't go forward. This may lead to difficult supply problems and may lead to even higher prices than what we saw last summer."

Birol said worldwide investments in energy in 2007 totaled about $390 billion, and a similar amount of investment yearly is needed to keep pace with energy demand.

In 2008, however, about $60 billion worth of energy investment has been delayed or deferred and the shortfall is expected to widen in 2009.

"The gap is going to get bigger and bigger," Birol warned. "We need to make sure that these investments are followed through."

Updated: November 25, 2008

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