How low can oil go? A lot lower, but it'll recover

By Christopher Johnson - Analysis

LONDON (Reuters) - World oil prices could easily fall below $50 a barrel and might even slip toward $40 or perhaps $35, but they will recover and could do so fairly quickly, analysts and economists say.

Benchmark U.S. crude futures dropped to a 22-month low under $55 on Thursday as evidence mounted that the deepening recession would have a severe impact on demand, reducing the use of oil by industries and individuals alike.

Oil has now fallen more than 60 percent from July's record $147.27 a barrel and is moving close to what is widely considered to be the average operating cost, or "cash cost," for the world's oil major oil companies around $50 a barrel.

Many analysts think the market is likely to fall further, breaching the psychological $50 barrier before recovering.

"How low prices go is rather random: $50, $40, $35? It could be any of those numbers," said Kevin Norrish, analyst at Barclays Capital in London. "All we would say is that the lower it goes, the further out of equilibrium the market is headed."

The oil price collapse over the last four months has reflected several factors hitting the market at the same time.

As the gravity of the global recession has become clear, economists have recalibrated their views of oil demand.

The International Energy Agency (IEA), which advises 28 industrialized countries, on Thursday slashed its global oil demand growth forecasts.

It says demand has grown this year at the slowest rate in a generation and next year it is expected to expand by only 350,000 barrels per day (bpd).

CONSERVATIVE

World oil demand is now expected to average 86.2 million bpd in 2008, rising to just 86.5 million bpd in 2009.

Some analysts say the IEA's assumptions are too conservative and that a dramatic contraction in demand in the major developed economies will offset growth in oil demand elsewhere and produce a rare absolute fall in global demand.

Falling demand forecasts have led to widespread assumptions by oil traders that oil markets will be oversupplied.

The Organization of the Petroleum Exporting Countries agreed last month to cut its oil production by 1.5 million bpd from November 1 and many analysts think it will trim its output further.

An Iranian oil official said on Thursday OPEC members would meet in Cairo on November 29 for "consultation" on the market, a move which temporarily helped push up oil prices off their lows.