Oil prices ready to recover after $100 fall

A motorist pumps fuel at a gas station in Putrajaya outside Kuala Lumpur December 15, 2008.

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

Technical analysts -- market watchers for whom the usual market fundamentals play a secondary role to past price movements when it comes to making forecasts -- are also starting to sound bullish for the first time since the end of the summer.

Oil analysts taking a technical view were some of the first to predict the collapse in crude prices back in July.

Walter Zimmermann at United Energy in New Jersey said: "We may see a final move down to the $30-$32 a barrel level -- but that final leg will probably be a bear-trap."

Zimmermann's view that oil prices are set to rise is partly based on Elliott Wave theory -- a technical strategy based on the idea that stock market boom and bust cycles are almost always compromised of 5 distinctive moves (or waves) up followed by five faster occurring waves down.

"Markets tend to take the escalator up and the elevator shaft down," said Zimmermann. "What's interesting is that in last cycle of the dotcom boom and bust, oil started to recover during the fourth wave down while equities were still falling.

"In my view, equities still have one further fall to make before the stock market can really recover, which should indicate that oil is ready to go higher."

While analysts increasingly see the potential for a recovery in oil prices, few expect prices to soar like they did between summer 2007 and summer 2008.

Clive Lambert, technical analyst at FuturesTechs in Southend-on-Sea, England, said that he expected to see less volatility in the oil market next year, with prices settling into a range between $40 and $70 a barrel.

"We've just been through a classic boom and bust cycle in the oil market, and the price action after such moves is generally sideways.

"We're picking up the pieces and surveying the wreckage - investors on both the long and the short side of this market have had their fingers burned, and even those who made money on the way up and the way down will now be looking for another market."

(Additional reporting by Richard Valdmanis in New York; Editing by Anthony Barker)