Home Finance Expect $40 per barrel for crude oil, prices drop below $50

Expect $40 per barrel for crude oil, prices drop below $50

by Business News Report

By Omoh Gabriel
Prices of crude oil, Nigeria’ main stay yesterday dropped below earlier prediction as prices of Brent and light crude went for $49.25 and $50.33 per barrel respectively at the futures market. Vanguard had exclusively reported in October when prices where still in the region of $100 per barrel that studies had shown that prices of crude oil will drop to $50 a barrel by the first quarter of 2009. But the decline in prices have moved faster than predicted.
Meanwhile, National oil groups have anticipated that prices of crude will slide to $40 a barrel.
According to report The world’s national oil companies expect oil prices to fall further and will cancel most planned investment projects even at current levels, according to the head of a Chinese state-owned group.
The report further said that a recent meeting of the national oil companies in Beijing had predicted oil prices would fall to about $40 a barrel, Fu Chengyu, chief executive of China National Offshore Oil Corporation, told a conference in Barcelona. “The consensus at the time was that everybody realised the oil price would be even lower,” Mr Fu told the Global China Business meeting. “Nobody knew where it would be but most of them said around $40.”

Vanguard’s earlier report had stated: Crude oil price may drop to $50 per barrel next year surveys and studies have shown. A study conducted by Business Monitor International to be released soon has predicted that prices of crude oil will slide to $50 a barrel in the third quarter of 2009. If this happens the 2009 federal budget being prepared which is predicated on $63 per barrel bench mark will be in jeopardy. The budget estimate will be fall short of expectation by $13 per barrel.
This implies that the federal and state governments will be hard press for cash may depend on the excess crude oil revenue to go through 2009. According to the report Nigeria and many and other “major oil producers would obviously suffer”. The report said “Most Gulf governments will continue to spend heavily in order to ‘buy’ political stability, but would be at risk of running budget deficits if oil went to US$40 per barrel.
IMF in its survey of the World Economic outlook 2009 said “The current financial market meltdown being witnessed in the United States and other advanced economies will likely lead to longer and deeper economic downturns in some of these countries.
“Economies like the United States, with more arms-length or market-based financial systems, seem to be particularly vulnerable to sharp contractions in activity in the face of financial stress,” Charles Collyns, Deputy Director in the IMF’s Research Department, said last week. Citing the chapter, “Financial Stress and Economic Downturns,” he added that “this is because leverage tends to be more pro-cyclical in these economies, which means that when a shock hits the financial system, the process of deleveraging can be more severe, and the risks of a credit crunch are greater.”
However, other factors also play a role in determining the impact of financial stress on the economy. In the case of the United States, the research notes, the health of the non-financial corporate sector and the timely and decisive reaction of the Federal Reserve in lowering interest rates have so far helped the country avoid slipping into a recession.
Meanwhile, the attentions of much-touted Sovereign Wealth Funds (SWFs) would probably turn inwards. Elsewhere, Russia’s economic revival in recent years which has largely come on the back of high oil prices could falter. In addition, governments would lose their capacity to fund national infrastructure programmes”.
The Business Monitor International report to be released this week for said “Countries where leaders have won popularity and increased fiscal spending thanks to high oil revenues would be expected to see instability. Venezuela is a case in point, and President Hugo Chavez would come under renewed pressure. Elsewhere, lower oil revenues would reduce a major source of corruption.
“So, all in all, there would be both winners and losers”.
A few months ago, discussions about the trajectory of oil prices were overwhelmingly focussed on new ‘super-spikes’ to US$200 per barrel. Now, however, prices have come off the boil, and this has prompted speculation on the possibility of a drop to US$50/bbl by the third quarter of 2009.
Giving reason for the possible drop of crude prices to $50 per barrel, the report stated “The slowdown in the world’s major economies and by extension emerging markets will mean reduced demand for oil across the board.
According to the report OPEC and non-OPEC supplies are rising, and in a context of weaker demand, this will result in a build-up of reserves. Couple with this is a stronger US dollar that will follow as Oil is priced in dollars, and a strong dollar is historically correlated with lower oil prices.
The report stated “We expect to see significantly lower inflation across the world. Indeed, the US and Eurozone could come close to deflation, a fate that would befall Japan once again. Needless to say, this backdrop would pave the way for interest rate cuts, providing a much-needed stimulus to economies hard-hit by the credit crunch. Asia would be an obvious beneficiary of cheaper oil prices. Most countries in the region import 80-100 per cent of their oil needs. However, on the negative side, a drastic decline could de-necessitate moves to improve energy efficiency and reduce pollution”.

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