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Tue 24 Feb 2009 01:36 PM

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Merrill Lynch sees oil price stabilising but no recovery

Analysts predict price of around $44 a barrel for H1, rising to $56 during H2.

Although there are no indications of an oil price recovery, there are signs that the market is stabilising, Merrill Lynch said on Tuesday.

“Global energy demand is no longer contracting as fast as it was in the fourth quarter of 2008, and capacity utilization rates in the commodities sector remain high compared to other industries,” a team of analysts wrote.

Merrill said it believes Brent and WTI crude oil will trade “in a range” for a few months and maintained a target price of around $44 per barrel in the first half of the year, given reduced supply, more stable demand and high inventories.

OPEC decided to cut oil output by 4.2 million barrels per day in December from the September level to shore up prices.

Saudi Arabia is expected to cut oil production by 1.3 million barrels per day, the UAE and Kuwait by 370,000 barrels each and Qatar by 110,000 barrels.

These cuts are the deepest since the 1980s and are likely to result in at least a 10 percent contraction in the oil sectors of these countries, Merrill said.

Monetary and fiscal policy will likely take time to impact the oil price, and many risks still lie ahead, it added.

An improving credit market, increasing inflation expectations and monetary and fiscal policy is expected to push crude oil prices towards an average of $56 per barrel in the second half.

On a positive note, the investment bank predicted that commodities will be the first to feel an upturn in the global economy.

“Utilisation rates have collapsed across pretty much every industry around the world, but spare productive capacity in the commodity sector remains tight compared to other parts of the economy,” it said.

Merril cautioned that a crisis in one or more “feeble” emerging markets that spreads to more stable developing nations could pose a threat to the oil price this year.

GCC economies are still dominated by oil, with hydrocarbons accounting for 32 percent of GDP, 74 percent of total exports and 84 percent of budget revenues.

“Our estimates suggest that every 100,000 barrel per day cut in oil production reduces headline GDP growth by circa 0.3 percentage points for Saudi Arabia, 1.5 percentage points for Kuwait and 1 percentage point for the UAE,” it said.

The investment bank is forecasting flat GDP growth in the GCC this year, with the economies of Saudi Arabia, Kuwait and the UAE shrinking by 0.2 percent, 1.8 percent and 0.6 percent respectively, and Qatar, Oman and Bahrain posting gains of 5.0 percent, 1.5 percent and 1.8 percent.

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