Oil slips to $59 on global growth pessimism

Oil prices slipped to $59 a barrel Wednesday as investors grappled with the prospect that global growth next year will slow more than originally feared, cutting demand for gasoline and other crude products.

Expectations that a snapshot of the U.S. inventories will also show reduced consumption of oil and derivatives also acted as a drag on the market.

Light, sweet crude for December delivery was down 32 cents to $59.01 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. The contract overnight fell $3.08 to settle at $59.33, the lowest closing price since March 2007.

The steep price declines of the past half year may be temporary. The International Energy Agency — the energy monitor for the world's industrialized nations — has nearly doubled its forecast for the price of oil over the next 20 years, because of rising demand in the developing world as well as surging costs of production as oil needs to be sourced from more expensive offshore fields and state-run companies.

In its World Energy Outlook Wednesday, it hiked its forecast for the price of a barrel of oil in 2030 to just over $200 in nominal terms, compared to its forecast last year of US$108 a barrel. Measured in constant dollars, it pegs oil at $120 a barrel in 2030, up from last year's forecast of $62.

Over 2008 to 2015, it predicts the price to average $100.

Presenting the report, IEA head Nobuo Tanaka told reporters in London that "while market imbalances will feed instability, the era of cheap oil is over."

Still the concept "cheap" is relative. Oil prices have fallen about 60 percent in four months, plunging from a record $147.27 in mid-July.

"We have a pretty good idea that global growth is going to be pretty awful next year and probably not much better in 2010," said Mark Pervan, senior commodity strategist with ANZ Bank in Melbourne. "There was clearly a bubble scenario in all commodities and that bubble has burst."

Investors are pricing in slowing crude demand growth from China, whose economy, the world's fourth largest, was once thought to be a counterweight to weakening demand from the U.S. and Europe.

U.S. bank Morgan Stanley earlier this week cut its 2009 forecast for Chinese economic growth to 7.5 percent from 8.2 percent. The bank expects Asia outside of Japan to grow 5.5 percent next year, the U.S. economy to shrink 1.3 percent and Europe to contract 0.6 percent.

"China is now seen as less of a backstop to falling demand in developed countries," Pervan said. "With definitive slowing in China, the market is even more sensitive to negative economic news out of the U.S. and Europe."

The World Bank said Tuesday it expects developing countries to grow 4.5 percent next year, down from its previous forecast of 6.4 percent growth. Developed countries will likely contract 0.1 percent in 2009, the Bank said.

Trader and analyst Stephen Schork noted that the reaction to Beijing's planned economic stimulus package earlier this week — and the subsequent oil price fluctuations — were symptomatic of the jittery state the market finds itself in.

"It is important to remember that price is a function of the crowd's emotional input to a given fundamental event." he said in a research note. "Thus, those traders who thought it was a good idea to pay $65 Sunday night were probably the same traders who had to sell (at) $59 yesterday afternoon."

Investors have brushed off two recent production cuts by the Organization of Petroleum Exporting Countries, and prices have continued to fall amid talk of a third quota output reduction next month.

Qatar's prime minister, Sheikh Hamad Bin Jassim Bin Jabr Al-Thani, said Tuesday that "fair" oil prices of between $70 to $90 per barrel would ensure that expensive oil exploration could continue and help to avert price spikes in the future.

"The market has become so demand focused that obvious support mechanisms, like OPEC cutting supply, don't have the same impact," said Pervan, who expects prices to fall to $45 a barrel during the first quarter of next year.

Investors will be watching for signs of slowing U.S. demand in the weekly oil inventories report to be released by the U.S. Energy Department's Energy Information Administration. The petroleum supply report was expected to show that oil stocks rose 1.1 million barrels last week, according to the average of estimates in a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.

The Platts survey also showed that analysts projected gasoline inventories rose 850,000 million barrels and distillates increased 1 million barrels last week.

In other Nymex trading, heating oil futures slipped by more than 2 cents to $1.91 a gallon, while gasoline was flat at $1.31 a gallon. Natural gas for December delivery fell nearly 7 cents to $6.78 per 1,000 cubic feet.

In London, December Brent crude fell $1.45 to $54.26 a barrel on the ICE Futures exchange.

Source: Associated Press