Slowdown may halve oil price in 2009

A sharp global economic slowdown could depress oil prices by more than half their present level in 2009 and this could prompt Opec to trim output to prop up prices, according to a prominent Western oil analyst.

Leo Drollas, Deputy Director of the London-based Centre for Global Energy Studies (CGES), said several factors had led to the recent sharp rise in crude prices, including strong demand, speculation, Opec's low spare capacity, the weak US dollar and the Cartel's drive for higher prices.

In a study presented to an oil conference in Tokyo this week, Drollas said strong demand had sharply pushed up the call on Opec crude but he warned that slowing global economy next year would push down the demand. "In 2008 the call on Opec (with stocks) remains well above its expected output until the the third quarter of 2008.

"In 2009 the picture is quite different, the weak global economy causing oil demand growth to slacken considerably and the call on Opec to drop well below recent levels," said the study.

"Two scenarios bracket our reference case. On the upside we have the IEA's more buoyant view of oil demand growth for this year and next year. On the downside, a small amount of additional non-Opec supplies in 2008 are enough to bring the oil price down to $65/bbl by the end of 2009."

Referring to forecasts by CGES about an impending sharp economic slowdown in 2009, he said the need for Opec oil will be down by almost one mbpd, requiring production cuts from the organisation to keep up the price of oil. Drollas, whose centre is owned by former Saudi Oil Minister Sheikh Ahmed Zaki Al Yamani, cited arguments by the 13-nation Opec that the oil market is well supplied and high prices are a result of growing speculation. Another argument is that oil producers need high oil prices because of cost escalation, dollar depreciation and their financial needs. In contrast, the CGES believes supplies have been tight, causing a decline in the stocks of the Organisation of Economic Cooperation and Development (OECD). "Led by Saudi Arabia, Opec squeezed the oil market in 2006-7, leaving stock cover at low levels (OECD company cover at 52 days' worth at the start off 2008 versus 54 at the beginning of 2007)) and spare output capacity bellow five per cent of world oil consumption," Drollas said.

"The Kingdom tightened the market in the last quarter of 2006 because it feared the price repercussions of the large OECD company oil inventory build in that quarter..... low spare capacity is generally associated with high prices and vice versa.

"However, the relationship is distorted by Opec's occasional drives to push up oil prices by constraining production and thus raising spare capacity. Between the second quarter of 2003 and the first quarter of 2006 spare capacity became much tighter. Spare capacity has been falling since the first quarter of 2007."

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