Oil prices are headed back to $50, according to analyst at an investment firm based in Russia.
Chris Weafer, analyst at Uralsib Capital in Moscow, said the Russian market is projecting that oil prices will plunge to about $50 per barrel, The Wall Street Journal reported Tuesday. Amid a U.S. recession and a global economic slowdown, oil has fallen about 38% to $91.07 per barrel after hitting a record high of $147.27 per barrel in July.
Oil price projections are especially important in Russia because oil revenue has provided much of the capital for Russia's development, economic expansion and funds for the Russian Government's programs.
Further, Weafer now expects Russia's GDP growth to slow to 3% in 2009, as global growth and the financial crisis slows both foreign demand for oil and commercial activity in Russia, The Journal reported. In turn, that will force Russia's government to reduce spending for certain programs, while eliminating funding for others, Weafer added.
Economist Peter Dawson said while an oil price projection of $50 per barrel may represent "a perfect-condition, low-side estimate" he understands where Analyst Weafer is coming from.
"We'll assume the financial crisis is resolved. There's no guarantee that will occur, but let's assume we have functioning credit markets. Even given flowing credit, we still have a U.S. recession or a deep U.S. recession, slowing global growth, or worse, and a radically changed environment for investment capital. Emerging market companies and sovereigns [sovereign investment funds] aren't going to commit willy-nilly to commercial projects, so that suggests a further reduction in oil consumption growth abroad," Dawson said. "This changed investment environment points to sharply lower oil prices, probably in the $70-range, but it's not unreasonable to predict a price below that."
Oil / Economic Analysis: While both gasoline and oil consumption has declined in the U.S., few analysts expect consumption declines internationally. However, global consumption growth will be considerably lower, given slower global GDP growth. Add a credit hangover component in the aftermath of the financial crisis, and one can see how Uralsib's Weafer arrived at his $50 oil forecast.
True, OPEC may try to support oil's price with a production cut or two, but that doesn't change the economic landscape: robust global growth conditions no longer exist to propel oil's price higher.