Oil prices ready to recover after $100 fall

By David Sheppard - Analysis

LONDON (Reuters) - Oil's collapse by more than $100 a barrel has made July's all-time high above $147 seem a distant memory but many analysts now expect a rebound and say crude's bear market may prove to have been exceptionally brief.

Oil prices could already have hit rock-bottom for 2008 when they touched lows near $40 a barrel this month, and are poised to climb despite the dire outlook for the global economy.

Cumulative production cuts by OPEC -- which is expected to slash output further this week -- as well as the need to encourage future investment in oil exploration have led some analysts to make cautiously bullish noises over the past week.

This view is reinforced by the precedent of past price movements, mapped by technical analysts who study charts.

Tim Evans, energy analyst for Citi Futures Perspective in New York, believes that the oil market could have just witnessed the shortest bear market in history.

"We've hit the low," Evans said. "Whether the bottom is $40.50 or $38 or $36 is really not that critical here -- in the larger scheme of things, this is a much better and safer place to buy crude oil than $140 a barrel was."

U.S. bank Merrill Lynch shocked investors earlier this month by saying that oil prices could fall as low as $25 a barrel next year. However, Merrill analysts have cautioned that $25 a barrel is the most extreme scenario for oil markets.

Francisco Blanch, head of commodities research at Merrill Lynch in London said: "I think prices won't go below $25 a barrel - and that's already an extreme scenario which would require OPEC not to cut production quickly enough and China to fall into a recession."

Merrill Lynch's current prediction for the most likely average price in 2009 is $50 a barrel.

"$25 a barrel is very painful for producers like OPEC so they will be trying to avoid it like the plague," Blanch said.

Shrinking global oil demand and the collapse in crude prices has hit members of the Organization of the Petroleum Exporting Countries hard.

The producer group has already slashed production by 2 million barrels per day since September, and analysts are now predicting the group will enact its largest ever output cut when it meets in Algeria on Dec 17.

Lower oil prices have not only hurt OPEC members' revenues, they have heightened fears of a future supply crunch as producers hold back on investing in new oil production -- something which has worried both producers and consumers alike.

"I'm someone who tends to take it seriously when OPEC starts cutting production," said Evans at Citi Futures Perspective.

TECHNICAL BOUNCE