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US projects oil price of $55/b in 2009; IEA slashes demand forecast

In June 2008, it would have looked crazy and pessimistic. Now the Energy Information Administration's (EIA) forecast for oil prices in 2009 – $51 a barrel – looks optimistic

Last month, prices for WTI were hovering around $45/b, with a cut from Opec at a summit in Algeria already built into prices. Demand in 2008 and 2009 could be lower than it was in 2007.

The EIA, the statistical arm of the US Department of Energy, predicted last month that WTI will have averaged $100/b in 2008. A halving in the average price for 2009 comes amid "the increasing likelihood of a prolonged global economic downturn". Real global GDP growth, says the IEA, is expected to fall from about 4% in 2006 to 2.7% over 2008 and to be just 0.5% in 2009. Even that forecast is happier than the outlook offered by other analysts. Deutsche Bank last month slashed its forecast for world GDP growth in 2009 to 0.2% (compared with 1.2% in 2008), although the World Bank forecasts growth of 0.9% this year.

Prices are naturally following demand, which is now sinking rapidly. Oil demand in 2008 will have fallen for the first time since 1983, according to the International Energy Agency (IEA). It said last month that average consumption would amount to 85.8m barrels a day (b/d) – 200,000 b/d lower than in 2007. Consumption in 2009 will average 86.3m b/d, it adds; this would constitute a small amount of growth, based on the IMF's prediction of a world economic recovery beginning in mid-2009. The EIA offers a more gloomy forecast for demand next year, predicting a fall in consumption of 450,000 b/d.

The IEA's monthly oil-market report makes depressing reading for oil producers. "The groundswell of negative oil-market sentiment has continued unabated in the past month. Spot prices are down by around $15/b [since November's report], contango has widened, floating storage has become available to mop up barrels from an awash market and OECD economic news becomes gloomier by the day. The extent of the price fall since July tells a tale of slumping OECD demand."

Opec's response – the group agreed last month to cut production again – simply boosts spare capacity, says the IEA. "Our own supply/demand balances suggest a lower call on Opec in 2009 at 30.7m b/d, compared with 31.5m b/d in 2008, a situation that would leave global inventory unchanged. [...] If more pessimistic economic forecasts are borne out, non-OECD demand and the call on Opec could move lower still."

The agency also says: "If we are now heading for a prolonged and global outright recession, then the 0.5% global oil demand growth we now envisage for next year may not materialise."

If the oil price forecasts from the two bodies do not sound good for energy firms, they should bring comfort for US drivers, says the EIA: already, average gasoline and diesel prices in the first week of December had fallen to $1.70 a gallon and $2.52/USG, respectively – almost a quarter of prices in European countries and $2/USG beneath prices last July. This is unlikely to change significantly, says the EIA: "With the assumption of a fragile economy throughout 2009, along with lower projected crude oil prices, annual average retail gasoline and diesel fuel prices in 2009 are projected to be $2.03/USG and $2.47/USG, respectively."

Meanwhile, although non-Opec supply is estimated to have fallen by 310,000 b/d in 2008, it will rise by 410,000 b/d in 2009, says the EIA (the IEA says it will rise by 480,000 b/d), with new production coming on stream in Azerbaijan, Brazil and the US. However, the EIA warned consumers that the global economic slow-down and falling oil prices "bring additional risk to the usual uncertainties (unexpected disruptions, project delays, underestimation of decline rates) concerning non-Opec supply growth". Tighter financing conditions will also make new production more difficult, says the EIA, echoing warnings from the IEA and other analysts. "This would heighten the risk of a return to a tight supply situation once the world economy and oil demand growth recover."

US residential natural gas prices and gas wellhead prices have also fallen on the back of slumping oil markets, the EIA reports. The latter will average $6.25/'000 cubic feet (cf) in 2009 compared with $9.17/'000 cf in 2008.

Opec supply will fall from 32.6m b/d in the third quarter of 2008 to an average of 30.6m b/d during 2009, says the EIA. The group's surplus production capacity will rise to 4m b/d.

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