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Oil Could Fall to $50 in Global Recession, Warns Merrill Lynch

Crude-oil prices may fall as low as $50 a barrel next year, about half current levels, in the "unlikely" event of a global recession, weighing on shares of petroleum producers, Merrill Lynch said.

A decline in prices to $50 would impede investment decisions on projects, said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp in Tokyo. "You're already seeing some delays because of the credit issues now," Nunan said."Longer-term, this is bullish because it adds to the already chronic supply problem."

Meanwhile a "string" of fields in Saudi Arabia, Qatar and elsewhere within OPEC is set to increase capacity within the exporting group by about 3 million barrels a day in the next 18 months, the analysts said. In addition, refinery expansions and new projects will add about 900,000 barrels a day of distillate and 700,000 barrels a day of gasoline production capacity, they estimate.

The long-term cycle for oil prices "remains intact" because of under-investment in the industry, the Merrill analysts, based in Sydney and Melbourne, said. "We argue that structural under-investment in the energy sector remains a key concern and once the economy re-emerges from its current decelerating trend, energy demand will likely start to strengthen and place upward pressure on prices that could structurally break above US$150 a barrel as economic activity recovers," Merrill said.

Business Intelligence, October 2, 2008

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