Crude prices likely to fall sharply as demand slows

Singapore: Oil prices could fall sharply toward the end of this year or early next year as evidence of eroding demand in Asian economies slowly materialises, investment bank Lehman Brothers said in a report.

Oil prices surged to a record high above $139 a barrel on Friday, sharply reversing nearly $14 in losses over the previous two weeks, when traders had fretted that Asian demand growth could wane as many nations cut subsidies, raising fuel prices.

Lehman analysts said they believed oil prices in the high double-digits would curb demand growth enough to allow supplies to catch up, but that it may take months for demand destruction to appear in data, and that oil traders "appear to have lost patience".

"If prices continue to rise from here, we fear that economic tipping points could be reached in Asia and the market will find itself with more demand destruction than it cares for," analysts Adam Robinson and Michael Waldron said in a report dated June 6.

"The problem, however, is that barring an economic meltdown, the data we need to verify our oil market argument is unlikely to become available until well after this summer."

Unlike most industrialised nations that release detailed data on oil production, demand and inventories on a weekly or monthly basis, major Asian econ-omies including China and India typically release only output and trade data, leaving analysts to guess at things such as consumption rates or changes in stocks.

Impact

After six years of rallying oil prices, demand destruction is now becoming apparent in the US, whose gasoline use is more than one-tenth of the world's oil consumption.

A survey issued last week by Ipsos Public Affairs found 74 per cent of Americans would change their driving habits if prices were to top $4.

"Until the fourth quarter, there certainly appears to be additional spike risk in an impatient market. But when the data becomes available, the price action could be as sharp on the way down as on the way up," the Lehman analysts said.

Asia's third-largest consumer India - plus smaller users Taiwan, Malaysia, Indonesia and Sri Lanka - have all hiked fuel prices as the burden of cheap subsidised fuel becomes too great to bear, although many analysts see little hope for a significant fall in demand unless China also raises regulated prices.

Outlook: $150 oil likely in summer

Oil prices are likely to hit $150 a barrel this summer season, the global head of commodities research at Goldman Sachs said yesterday, as tighter supplies outweigh weakening demand.

"I would suggest that the likelihood of that happening sooner has increased tremendously sometime in summer," Jeffrey Currie told anoil and gas conference in Kuala Lumpur, referring to crude prices at $150 a barrel.

- Reuters