Oil Price Approaching $50, Some Expect $45

ONG Focus - Insights

Written by Oil N' Gold | Thu Nov 13 08 06:41 ET

Oil price nosedived yesterday and closed 5.3% lower to 56.16. Today, the benchmark contract extended the fall and plunged to as low as 54.67 before recovering to 56.13. While we believe our target of 53.69 will be reached soon, we expect more downside from the black gold to $50/bbl. The IEA lowered its 2009 estimate by 670 000 bpd to 86.5M bpd, in response to IMF's downgrade on economic growth. Concerning China, the major growth engine, demand is forecast to rise 3.7% to 8.2M bpd in 2009, lower than the 8.4M bpd estimate in September. In terms of oil price, the agency lowered its 2009 oil price assumption to $80/bbl from $110/ bbl. Crude oil futures have slumped by more than 60% from the peak of 147.27 in July. It's very likely for the agency to lower its oil demand forecast for the coming year in its next report. Recent development on world economies has been disastrous with much disappointment from corporate earnings and downward revision on business outlook. The largest US electronics retailer Best Buy warned of a slowdown in spending Wednesday. Department store chain Macy's Inc. also said it lost $44 million in the 3Q08 as sales fell more than 7%. Stock markets, a leading indicator in economic prospect, dropped 5% in US yesterday followed by tumble in Asian markets. The MSCI Asia Pacific Index fell 4.7% to 82.35. US Energy Department would release weekly petroleum inventory today. According to Bloomberg survey, analysts expected crude oil stockpiles increased 1 mmb in the week ended Nov 7. They also estimated gasoline stockpiles increased 1 mmb while supplies of distillate fuel added 0.9 mmb. The forecasts were higher than a day ago in which analysts expected addition of 0.75 mmb in crude and 0.2 mmb in gasoline stockpiles. It's obvious that the OPEC failed to see any impact from the production cut of 1.5M bpd in October. Seeing oil price approaching $50 (Some analysts even revised year-end target to $45/bbl), the members said they may not wait until December for another meeting. Some said the cartel may meet as early was November 29. Gold made a breakout of the recent 'triangle' to the downside. Currently recovered to 713.8, the precious metal for December delivery fell to as low as 708.1 in Asian session. Although oversold condition may trigger rebound, we remained bearish on the metal in near term and expected a re-test of 681 support. Strength in USD (especially for weakness in Euro) is always the reason for gold's decline. The Euro fell to 2-week low against the greenback after Germany reported 3Q08 GDP contracted 0.5% after shrinking 0.4% in 3Q08. Sluggish business and consumer activities would trigger the ECB to cut interest rates from 3.25% more aggressively in the next meeting. The single currency fell to 1.2389, the lowest since Oct 28, before rebounding to 1.2487. The implied yield on Euribor futures contracts expiring in March fell to 2.70% from 3.15% at end-October. The pound, which also slipped to 6-year low Wednesday, extended weakness to 1.4807 before recovering to 1.4909. Reason for the selloff is also about rate cut. Despite the surprising 150 bps rate cut last week, BOE Government Mervyn King said that the nation is ready for more reduction in order to stimulate economy. Although less severe than oil, gold retreated by 30% from its peak at 1033.9 and some investors started to think it's about time to accumulate the precious metal again. Morgan Stanley said gold may climb above $1000/oz in 2011 due to increase in demand and reduction in global mine output.