The passing of peak oil?

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Despite efforts to diversify their economies, Gulf Cooperation Council states still derive up to 90 percent of their export revenues from oil.

Back in July, a barrel of crude cost $147. Fast forward three months and it is back under $70, amid fears of a global recession coupled with a significant slump in demand. So what does the drop mean for Gulf producers? Soren Billing reports.

When a goldman sachs analyst predicted that oil prices could reach $200 a barrel over the next six to 24 months in May, it sent shockwaves around the world.

Newsweek ran a cover that conceptualized what a future $200-a-barrel-world would look like, while the Los Angeles Times envisaged a breakthrough in telecommuting. All the while, Western governments railed against OPEC for refusing to increase output.

By September, the same analyst cut his 2009 oil price target from $140 to $110. Last week, Goldman Sachs slashed its 2009 oil price target by another $35 to $75.

"We clearly underestimated the depth and duration of the global financial crisis," a team of commodity analysts wrote in a research note. And yet $200 oil didn't seem like such a strange idea this summer, when a barrel of crude was nearing $147.

Three months later and it looks like most people are going to have to keep coming in to the office for work, at least for the next two years or so. This month, oil traded below $70 for the first time in 15 months, less than half its peak value.

Fear of a global recession is the main factor behind the drop, but it has been coupled with some real softening in demand, especially in emerging markets like China and India. Speculation in the futures market has also cooled down.

"Anecdotally speaking, when gasoline prices in the US hit the $4 a gallon mark you did see a sudden fall off in demand," Bobby Sarkar, a senior analyst at Al Mal Capital, tells Arabian Business.

"When oil went below $72-$73, it reached a technically important point which portends further weakness, at least in the near term."

Still, he now thinks the sell-off has been overdone. "You're probably going to see oil prices stabilise and go higher. Longer term, I think oil prices of $80 a barrel are sustainable."

Since OPEC's Sept 10 meeting, where it decided to lower supplies by 500,000 barrels a day, several analysts have cut their estimates.

Credit Suisse reduced its fourth quarter forecast two weeks ago to $75 from $110. It also pared its 2009 forecast to $75 from $110. Deutsche Bank reckons oil will average $92.50 next year, 23 percent lower than its previous forecast and down from $106 this year.

"The deteriorating outlook for world growth is leading to a violent correction in commodity prices," the company said in a research note to investors this month.

"We believe the nature of the slowdown in US and world GDP growth will have important implications for the degree and duration of commodity price weakness that may lie ahead."

BNP Paribas believes a further decline in the global GDP outlook could be a trigger for lower oil prices, with global growth of 2 percent or less likely to result in falling oil consumption.

"It's not a question of demand actually drying up," says Sarkar of Al Mal Capital. "The bull case for oil was that there is going to be huge demand for oil from India and China."

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