Oil drops below $50 as forecast cut

There are no upsides to the current recession. Unlike previous cyclical downturns triggered by inventory adjustments, this one is anything but typical, driven by the end of a massively leveraged bubble, falling housing prices, and toxic assets that have produced a global financial crisis.

Hence, there are only consequences from this recession, not benefits, and one consequence is lower global oil demand. The International Energy Agency now expects demand to fall to its lowest level in five years.

The IEA now sees global oil demand falling 2.8 percent to 83.4 million barrels per day (bdp) in 2009, with global oil supply falling about four percent to about that same 83.4 million bpd level. Global oil demand totaled about 85.8 million bpd in 2008. Oil demand for Q1 was revised lower by 700,000 barrels per day. "The pace of contraction is close to early 1980s levels, with a growing consensus that economic and oil demand recovery will be deferred to 2010," IEA said in its report.

Crude oil plunged $3.14 to $49.10 per barrel early Monday on the report, with the other major energy commodities also declining. Unleaded gasoline fell 4 cents to $1.44 per gallon and heating oil declined 3.5 cents to $1.39 per gallon; natural gas fell 7 cents to $3.54 per million BTUs.

Bearish report

The report is bad news for oil bulls, who are counting U.S. and global economic recoveries to perk-up demand heading into the second half of 2009. Oil has accelerated out of the $35-range to trade above $50 on the above sentiment, but the IEA's latest data will fan the oil bears' argument that demand conditions are hardly robust enough to work-off high oil inventories, globally. Further, current demand also is in the bear's favor: weekly U.S. gasoline demand has been flat to slightly lower on a year-over-year basis, and emerging market oil demand has shown only minor growth.

Further, business executives, consumers, and public policy analysts alike are certainly rooting for the oil bears to win, or at least for oil's price to trend lower in the quarters ahead. The decline serves as a de facto stimulus package and tax cut. Each $1 per barrel drop in oil increases U.S. GDP by $100 billion per year and every one cent decline in gasoline increases U.S. consumer disposable income by $600 million per year.

For investors, declining oil prices are net-negative for the oil sector, including integrated oil companies and related oil plays, such as companies who build/maintain oil rigs and the energy infrastructure. But the price is a plus for most other companies, including the major airlines and delivery companies. The major airlines particularly love low prices, as jet fuel is typically their second or top operating expense.

Oil Analysis: Will oil breach -- and remain below -- the psychologically important $50 level in the quarters ahead? At this juncture, oil is at a bit of a crossroad. Oil's price will depend on Q2 corporate earnings, durable goods orders, home sales, and job losses in the coming months. If reports come in better-than-expected, oil traders will ignore the recent IEA data and bid oil up on the belief an approaching economic recovery will increase oil demand. However, if the reports are bearish and point a distant economic recovery, a drop to $40 would likely occur.

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