Analyst sees oil dropping to $50 on global economic slowdown

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.