Oil prices are likely to sink as low as $35 a barrel without a massive production cut from the Organization of Petroleum Exporting Countries, Lawrence Eagles, head of commodities research at JPMorgan Chase & Co., said Friday.
OPEC needs to cut 3 million barrels a day to compensate for the bleak global economic outlook, which is expected to result next year in the first contraction to oil demand since the early 1980s. The group agreed in October to reduce output by 1.5 million barrels a day, but OPEC is unlikely to successfully make further cuts quickly enough to prevent further declines in oil prices, Eagles said in a conference call.
"I can't see how they can manage to keep prices at a stable level," unless the group agrees in advance to continually cut production so long as oil remains below a certain level, Eagles said. OPEC is unlikely to adopt that tactic, known as a price band mechanism, he said.
Oil prices have plunged below $50 a barrel this week, to the lowest point since May 2005, just four months after reaching record highs above $145. Forecasters see little hope for a significant recovery before the second half of 2009. Deutsche Bank recently predicted $40 a barrel oil by April. January crude futures recently traded at $49.49 a barrel on the New York Mercantile Exchange.
JPMorgan lowered its 2009 oil price forecast to $69 a barrel, from a $74.75 prediction in October. The bank now expects global oil demand to contract by 527,000 barrels a day next year, and even that relies on a relatively optimistic forecast for growth in China, Eagles said.
With little hope for the global economy, OPEC holds the key to halting the slide in prices. The group is meeting in Cairo on Nov. 29, and in Oran, Algeria on Dec. 17. Members are complying with the first cut to a higher degree than they have in the past, reducing exports by about 1 million barrels a day, according to tanker trackers and analysts.
If OPEC fails to put a floor under oil prices, it will be left to other producers to reduce production. Non-OPEC exporters and international oil companies such as Exxon Mobil Corp. have a much lower threshold for shutting in wells, around $35 a barrel, Eagles said. The average price needed by OPEC countries to keep new exploration active and pay the bills for the country is $57 per barrel. Under that level future production will suffer and countries will be running at a deficit.
Mexico, America's third-largest oil supplier has exported 17 percent less crude this year. Mexico's state-owned Petroleos Mexicanos says daily production through October averaged 2.8 million barrels, down nearly 10 percent from the same period last year.
Pemex says production has dropped by a third this year at Mexico's main Cantarell oil field. An energy reform package approved by Mexico's Congress last month aims to reverse declining production by giving Pemex more leeway to hire private companies and devote more revenue to explore for oil.
Pemex has said production could drop by more than 25 percent in three years without new discoveries.