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Oil Forecast from Bill Newman

Research Capital's Bill Newman's oil price forecast points to supply cuts due to lower investment and natural production declines facing off against a drop in global demand.

As a result of the growing economic crisis, global demand for crude has crumbled. In an attempt to rebalance the market, OPEC has pledged to cut a total of 4.2 million bbl/d from September 2008 production level. Based upon past performance, investors are sceptical that OPEC will adhere to the new the quotas. However, most OPEC members need much higher prices to fully fund government budgets, which could motivate higher compliance. Worldwide, energy companies continue to slash capital spending and are moving into a survival mode.

With world production declines averaging approximately 6.7% per year, a significant investment is needed just to maintain current levels.

However, we don’t expect a significant recovery in the price of oil until demand once again climbs above supply and world inventory levels begin to decline. In fact, prices could fall further on new disappointing economic news or if OPEC members fail to achieve high compliance to production quotas. In the mid to long term, we believe that the current tight capital markets, which have lead to a drop in drilling and the deferral or cancellation of major projects, including Canada’s oil sands plays, will cut supply. This combined with potential of an economic recovery in 2H/09 has set the conditions for a sustained run in oil prices beginning in late 2009.

Given the severity of the global economic slowdown, we are decreasing our 2009 NYMEX WTI crude oil price assumption from US$75/bbl to US$60/bbl, and we have set our 2010 forecast at US$75/bbl.