Forecast for oil price slashed by IEA

The International Energy Agency (IEA) slashed its oil price forecast for 2009 from $110 to $80 per barrel yesterday in the face of looming recession in the world's developed economies.

The price of London Brent crude oil dropped to a three-and-a-half-year low of just $50.60 per barrel, before recovering to close at $51.99 on growing expectations that the Organisation of Petroleum Exporting Countries (Opec) will hold an emergency meeting in Cairo at the end of this month to discuss further output cuts. In post-settlement trading, US crude rose 5 per cent to above $59 a barrel.

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Oil has lost nearly two-thirds of its sale value since the all-time high of $147 in July, with Opec's daily basket price dropping below $50 this week despite two rounds of output cuts – most recently by 1.5 million barrels per day (bpd), or about 5 per cent, earlier this month – as a measure designed to shore up falling prices. Demand, however, is still continuing to fall, according to the latest figures from the IEA yesterday, bringing down the oil price with it.

Not only has the global requirement for oil contracted in the third quarter of 2008 for the first time in more than five years, but that trend is expected to continue in this quarter. The group has revised its annual growth estimates down to "a paltry" 0.1 million barrels a day (mbd) in 2008 and 0.4 mbd next year.

Economic slowdown is playing havoc with developed countries' demand for oil, the IEA says. In the US, the market is expected to contract by 5.4 per cent year on year in 2008, and by another 2 per cent in 2009. European demand is also on the slide, and is expected to average 15.2 million bpd in 2008 and 15 million bpd next year – an annual decline of 0.5 per cent and 1.4 per cent respectively.

But the real unknown is China. How far the global slowdown will affect China is difficult to predict, as is the impact of the $600bn government investment package announced by the Beijing government last weekend. The latest estimates are that the country's oil demand will grow some 180,000 bpd slower than originally thought, although it will still come in at around 3.7 per cent, or 8.2 million bpd, in 2009.

Contrary to the implication of the ever-falling price, demand is not the only issue. Private oil companies are already reining in plans for investment-heavy expansion, in part because falling prices no longer justify the extra output, in part as a punt on further declines in project costs. Both BG Group and Shell have made announcements in recent weeks, postponing planned investment programmes in Kazakhstan and Canada respectively.

Simply restricting supply further may not be enough to buoy the price. John Waterlow, a principal analyst at Wood McKenzie, said: "Logic would point to another production cut from Opec next month. But to some degree we are in the same position now, on the way down, that we were in on the way up, namely one where sentiment has taken over and the market is reacting less to the fundamentals and more to herd instinct."

The IEA warned this week that the world could be left in danger of a supply crunch if too much capacity is cut in response to falling prices. We may be seeing the beginnings of the next oil boom, says Mr Waterlow. "The more that investment drops, the more damage is done to the prospects of supply in the future," he said. "That could lead us back into a period of high prices because as the world comes out of recession, most of the demand will return."

Up in the air: Airlines hedge their bets

Major European airlines are taking their time striking fuel hedging agreements for 2009 as oil prices plunge and the global credit crisis continues to dry up the financial markets. Next year's arrangements currently represent a considerably smaller proportion of airlines' needs than this year. BA has just 35 per cent of its needs hedged, compared with 78 per cent in 2008. Iberia is at 30 per cent for 2009, less than half of the 70 per cent this year. Lufthansa has just 57 per cent hedged, compared with 72 per cent in 2008. In part, the carriers are betting the oil price will continue to fall. But there are also problems finding banks willing to offer hedging deals – not least since the collapse of Lehman Brothers, a major player. Earlier this month, Michael O'Leary, the Ryanair boss, said he was 25 per cent hedged, rather than the planned 50 per cent, because of illiquidity in the market.