Oil Prices Could Fall Further

While strong oil demand from China and other developing countries helped to push oil prices trough $145 per barrel in the first half of 2008, the collapse in global demand for oil in the fourth quarter of 2008 has sent the price of oil below $40 per barrel.

To some extent, with the global economy slowing down the demand for oil is deteriorating and as the financial crisis halts borrowing, investors have been pulling out of commodities to release cash. In fact, U.S. total petroleum demand is currently down 6.1% year-over-year and Chinese crude oil imports fell in November. Furthermore, since the most popular oil futures contract is priced in dollars, the rising value of the greenback has accentuated that fall in prices.

Looking ahead, the worst is yet to come as the rapid contraction in the oil prices has depressed the spot price relative to future prices, creating what oil traders call a contango. This situation creates an environment where oil companies try to store oil in anticipation of future price increase. However, the rise in the storage cost and the resistance of some countries to the cut in oil production may result in the sudden unload of oil on to the market for immediate delivery, thereby forcing down the spot price even further

Anna Fedec, contact@tradingeconomics.com
12/23/2008 7:28:45 AM