Oil & Gas Review, October 2008 by Lloyds TSB

We expected oil prices to fall below $100 a barrel by end-2008 and they have, we forecast a range of $80-$100 a barrel in 2009. Currently oil prices are below this level

Oil prices retrace back to last year’s levels on fears of global recession
· We expected oil prices to fall below $100 a barrel by end-2008 and they have, we forecast a range of $80-$100 a barrel in 2009. Currently oil prices are below this level – WTI futures are trading just above $70 a barrel. Prices are now back where they were twelve months ago, wiping out the speculative bubble, as traders shun commodity funds on fears of a global recession.

· Prices are now closer to levels justified by economic fundamentals. Our view is that prices will also be supported around the $80-$100 a barrel level in the medium term. The economic rationale for this is that although global growth will slow, industrial and infrastructure development in emerging markets will underpin demand for oil and other commodities. So we do not expect prices to collapse much below the $80 a barrel level and they may even rise again, especially as OPEC members are likely to start discussing and subsequently implementing production cuts.

· In the UK, oil & gas production has declined in seven out of the last eight years. In 2007, output fell by 1.7% despite around £11.5bn in new investment. Hence, the long term UK production trend is downwards, but the industry has been kept profitable by high prices, which have up to now justified investment in the extraction of less accessible reserves, often by specialist companies. Rising exports of oil production support services, including technology, to developing markets, is also a growing feature of the industry.

· The UK oil and gas sector increased their draw-downs of agreed facilities this year, leading to a switch back to a net liability position with UK banks (from a net deposit position) for the first time since December 2002.

 

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