06 December 2008

Brent breaks 40

Brent crude - the benchmark for Newfoundland and Labrador crude - settled at US$39.74 on Friday for the first time in four years.

West Texas Intermediate  - the price usually quoted by news media - closed the day at US$40.41.

The forty dollar mark has become a new marker both for analysts and the news media in the current  economic crisis.

On Thursday, a former Merrill Lynch analyst said that conditions may exist to bring crude oil below US$25 for a short period:

“A temporary drop below $25 a barrel is possible if the global recession extends to China and significant non-OPEC cuts are required,” Merrill commodity strategist Francisco Blanch said in yesterday’s report. “In the short run, global oil- demand growth will likely take a further beating as banks continue to cut credit to consumers and corporations.”

January put options on $20 oil - the option to sell at a specific price on a specific date - were popular on Friday.  What that means  is that there was increasing speculation  - although still very small - that oil would be that low by January.

Related to that, analysts no longer assume that China will be immune from the effects of the recession.

“Everybody – even the most bullish people – have now given up on the decoupling idea,” [Stephen Briggs, analyst at RBS Global Banking & Markets] said, referring to the argument that China was making up for any demand slowdown in the United States.

Merrill Lynch is now slashing its forecast average price for crude in 2009.  On October 1, the company projected US$90 but this week lowered the estimated average to US$50:

“In our view, oil prices could find a trough at the end of Q1 2009 or early Q2 2009 with the seasonal slowdown in demand. Then, as economic activity starts to strengthen, we see oil prices posting a modest recovery in the second half of 2009.”



George said...

Just saw another story on the January contract...
There are more bets on oil going below $20 US than there are for oil to rise above the $25 US mark.
Is it likely that the budget target of $87 a barrel oil will be "above the expected"?
Could we be headed towards a deficit position before the government thought we would?

Edward G. Hollett said...

George, as I have been pointing out all along, they will be in a cash deficit, no matter what unless they manage to scrape together a few bucks through cuts to spending where there is fat or by finding money in the couches in the Premier's Office.

The lower commodity prices go, the bigger the cash deficit becomes.

Now on an accrual basis they will still look good because that has some imaginary cash built into it that isn't affected as dramatically by fluctuations in the market as real cash.

They might even be able to claim the "surplus" on accrual was 800 million or so, given the way that is accounted.

But over in the real world of cash, they are short. It's just a question of short by how much.

With oil below 40 next, we'd have a truly difficult situation.

However, a difficult spot next year is due entirely to unsound fiscal policy and poor financial management by government over the past three years.

They grossly inflated spending out beyond anything sensible based netirely on artifically inflated oil prices.

They were warned.

They ignored the warnings.

They persisted and now the crash is coming.

Had they increased spending by even double the rate of inflation, they'd have been able to start long termc apital programs, paid down debt and done plenty of good PLUS put cash aside for a rainy day.

Instead they increased spending by six and seven times - not twice - the rate of inflation just because they had the money and - for most of that time - they were coming into a election.