Oil prices predicted to fall further, could hit $50

DOWNWARD PRESSURE: Analysts said oil prices are likely to fall further. (Getty Images)

World oil prices are likely to fall further if the rush to cash across global financial markets continues but crude is unlikely to dip for long below the oil industry's $50-a-barrel average operating cost, analysts said.

Benchmark US crude has fallen 45 percent from July's record $147.27 a barrel to trade at $81 a barrel Monday after settling at $77.70 on Friday, its lowest close in 13 months.

"We believe the deepening banking sector crisis and the significant slowdown in global growth that lies ahead will continue to put downward pressure on commodity prices," said Deutsche Bank in a report released on Friday.

"A combination of fear, de-stocking and disruptions across the supply chain owing to frozen credit markets is currently depressing oil demand far below where underlying economic fundamentals would suggest," Goldman Sachs said on Monday in a note to clients.

Goldman said it expected crude to average $75 in the fourth quarter and end the year at $70, but added: "Should the financial and economic crisis cut deeper into demand, the market could fall as low as $50 a barrel."

That is the price threshold that is widely considered to be the average operating cost, or "cash cost", for the world's oil major oil companies.

The average cost for the most expensive new projects - known as the marginal cost of production - is about $75-$80 a barrel, according to London-based analysts Bernstein Research.

"In the long run we continue to believe that oil and gas prices will trend up in line with the marginal cost of supply," said Bernstein.

"However, prices should continue to cycle between the cash cost at the bottom, $45-$50 a barrel, and the price of demand destruction, $110-$125 at the top."

An economic slowdown could reduce the cost of new supply by cutting the price of steel, energy and rig hires, reversing some of the rise in production costs of the past five years.

While oil prices longer-term are likely to find support from the cost of bringing new production onstream, near-term prices remain hostage to frozen credit markets.

"Sure, we're at the marginal cost of supply, but if equity markets continue to fall it will be hard for oil to resist further price declines," said Gary Ross, CEO at New York-based energy consultancy PIRA.

Deutsche Bank said oil was still more expensive in real terms, allowing for inflation over the 26-year period to 2008, than other commodities.

"We find oil prices would need to fall to $35 a barrel in order to bring prices in real terms back to their long run historical averages. However, we believe that important changes in the market especially the geographic location of marginal demand and supply suggest that $60 a barrel represents a more realistic characterisation of 'cheap' oil," it said.

Unlike other commodities, oil has a producer group that can step in to support prices - the Organisation of Petroleum Exporting Countries (OPEC).

"What makes oil unique among commodities is that there's a backstop on the supply side in the form of OPEC," said Ross.

OPEC's ability to defend prices will be tested at an emergency meeting the producer group has called for Nov. 18.

"We expect the organisation to be more vigilant in keeping to quotas now that prices have slipped below $90 a barrel and to vigorously defend $80," said Standard Chartered bank.

At its last meeting in September OPEC trimmed back production, effectively starting to defend prices - albeit only cautiously - at $100 a barrel.

Now OPEC price hawks Venezuela and Iran are pushing for a more aggressive move.

Caracas is estimated by Deutsche Bank to need $95 a barrel to balance its current account.

Leading producer Saudi Arabia needs $55 a barrel, Deutsche says.

The level of prices that Saudi Arabia would seek to defend is of huge interest to world oil markets but an issue that Riyadh has long declined to discuss.

While Saudi may find it politically uncomfortable to prop up prices as the world economy moves towards recession, OPEC may be able to justify a production cut because less of its oil would be needed as global fuel demand growth slows. (Reuters)

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Oil Prices
Posted by Maroun, Dubai on Sunday 19 October 2008 at 20:24 UAE time


Yes Oil prices price drop need to be verified through government authorities and ofcourse that takes time,good excuse , but Oil price rise DOESNT need authority approval !!

I have no idea but
Posted by Salim ALSuwaidi, Sharjah, U.A.E on Saturday 18 October 2008 at 22:07 UAE time


But In June and July, Airlines were raising ticketing prices for that they say because of Oil Price are going high, Since it went down don't they have to lower the price? barrel gone down, Prices in the Aviation Fuel still same price?

Petrol Prices
Posted by Ibrahim, Abu Dhabi, UAE on Friday 17 October 2008 at 20:03 UAE time


Sanjay, the price of petrol in the UAE is set by law and can only be changed with approval of the authorities. Such a process takes time, which is why you don't see the price changing very often. Diesel, on the other hand, is not controlled by law so its price fluctuates according to market requirements. Besides, when compared to industrial countries petrol in the UAE is dirt cheap. Right now all three petrol retailers are losing MILLIONS every day. Poor countries like India & Egypt subsidize petrol at great cost to themselves, but the political & social costs of allowing the market to determine petrol prices in those countries are too great. Bottom line - don't compare UAE petrol prices to Indian petrol prices.

Sanjay - Get real!
Posted by mhutch, Dubai, UAE on Wednesday 15 October 2008 at 16:34 UAE time


Sorry to disappoint you but the price of gas is subsidised and sold below true cost. If anything, gas prices are likely to rise to compensate for the shortfall in predicted income.

So will petrol prices be corrected?
Posted by Sanjay, Dubai, United Arab Emirates on Wednesday 15 October 2008 at 15:06 UAE time


Now that the price of oil is falling will Dubai cut back its cost of petrol - this may actually put pressure on prices other services to fall.

Oil prices could hit $50
Posted by GRAHAM WHITE, Seoul, Korea on Wednesday 15 October 2008 at 11:01 UAE time

Are these the same amazingly clever analysts who recently said oil would reach $200 this year? I wish I could get paid lots of money for putting a ruler on a straight line and extending it. Who does listen to these idiots anyway?

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