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A year of two halves

IF THE RUN-up to nearly $150/b in the first half of 2008 was the third oil shock, does the slump below $50/b by December count as the fourth? The second half of 2008, in its own way, was as spectacular as the first, as a seemingly relentless cycle of downgrades to GDP and oil-demand forecasts caused oil prices to drop by around two thirds in value.

In the first six months, Opec, with limited spare production capacity, could not stop prices from rising. By mid-December, it appeared to have the opposite problem. Cuts of 1.5 b/d from 1 November failed to prevent prices from falling. Given the cartel's poor record on compliance, the market wanted hard evidence that the promised Opec cuts are being implemented. As Petroleum Economist went to press, there were varying reports on the level of compliance achieved against the cuts the group promised in November. According to CGES, secondary sources estimate that Saudi Arabia cut production by around 300,000 b/d in November, leaving the kingdom's output some 400,000 b/d above its new quota level. Saudi Arabia claimed output was in line with its quota.

The cut announced on 17 December after the group's meeting in Algeria (see p4), may stabilise prices, although there is unlikely to be much upside until the market is supplied with evidence of compliance. And, in any case, many analysts argued that the market had already priced in a cut of 1.5m b/d. CGES says with demand in decline – it expects the world to use around 0.5m b/d less oil in 2009 than in 2008 – there is more downward pressure on oil prices than upward.

Prices seem to have found a floor at $40/b, but that may prove temporary, says CGES. Merrill Lynch says prices could sink to $25/b next year if recession spreads to China. UBS predicts a first-quarter average of $55/b, $50/b in the second and a rise to the 75/b range recently identified by Saudi Arabia as a desirable level for oil prices only in the second half of the year.

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