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.”