The Wall Street Journal-20080128-Crude Oil-s Rebound May Be Short-Lived- Analysts Forecast Prices Will Drop As Demand Slows

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Crude Oil's Rebound May Be Short-Lived; Analysts Forecast Prices Will Drop As Demand Slows

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With the Bush administration and the Federal Reserve doing all they can to prop up U.S. economic growth, crude-oil prices are taking their cue more from U.S. economic data than global supply and demand.

Despite a proposed fiscal stimulus package and a surprise U.S. interest-rate cut that propelled crude to its strongest rally of the year, oil consumption is still likely to be hit. That could mean prices have trouble staying around $90 a barrel, especially in the second quarter, traditionally the weakest for oil demand. Some analysts expect prices to consolidate around the mid-$80 range, while others predict a steeper decline, especially if a slowdown in U.S. economic growth becomes more pronounced.

New York crude-oil futures rebounded Thursday and Friday from a three-month closing low, after the Bush administration and top congressional leaders hammered out a $150 billion economic-stimulus plan. Light, sweet crude for March delivery on the New York Mercantile Exchange rose $1.30, or 1.5%, to $90.71 a barrel, marking the first time prices have rallied two days straight since the end of December.

Still, Nymex crude is down nearly 10% from its all-time high of $100.09 a barrel reached Jan. 3, amid fears that high oil prices and economic uncertainty are starting to make a dent in energy demand.

"We're going up on false pretenses, rallying on the stimulus and rate cuts, not because of supply and demand," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago who has been one of the most outspoken forecasters of surging oil prices over a rally that has lasted nearly five years. "People are starting to realize that if the U.S. has problems, the rest of the world will too, and I think we're going to see slowing demand that will pressure prices."

He said he expects oil to fall to as low as $67 a barrel this year. This could happen as soon as March or April, he adds, when Northern Hemisphere heating demand slows and before peak summer gasoline consumption kicks in.

Global oil-demand forecasts vary. The Organization of Petroleum Exporting Countries sees oil use at 87.4 million barrels a day in the first quarter and 85.6 million barrels a day in the second, while the International Energy Agency, a watchdog for the most industrialized nations, forecasts demand at 88.2 million barrels a day in the first quarter and 86.7 million barrels a day in the second. Neither group made a big downward revision in its estimates this month.

"Global oil-demand forecasts may slip as the effects of the financial crisis are reflected in consumer spending and commercial oil use," said Adam Sieminski, chief energy economist at Deutsche Bank in New York. The OPEC and IEA reports "may have come out too early in January to fully reflect the rising level of financial alarm that hit the markets."

He expects New York crude futures to fall to an average of $85 a barrel for the year and to average $80 in the second quarter.

Some analysts suggest that OPEC has more consumer data for the first quarter at its fingertips than the IEA has and could be more reliable. Others say the data from both groups should be viewed through the prism of the vested interests of each. They say OPEC is keen to show the world is well-supplied with oil and avoid pressure to increase production at its Friday meeting in Vienna, while the IEA would benefit from increased production and the extent to which it could alleviate pressure on high oil prices.

Most analysts see the pullback in oil prices this year and the uncertainty over the global economy as giving OPEC, which produces 40% of the world's oil, sufficient ammunition to withstand President Bush's calls for more oil to bring down prices. Indeed, members of OPEC have stuck to the line that there is enough oil supply to meet consumption and that prices are being driven higher mainly by speculation.

The extent to which oil traders aren't paying as much attention to the traditional drivers of prices was evident Thursday, when closely watched Department of Energy data showed big builds in crude-oil and gasoline inventories and the lowest implied gasoline demand in nearly two years. After an initial sputter lower, prices turned in their biggest daily gain for the year on optimism about the effect of a planned U.S. fiscal-stimulus package.