Oil Prices Likely to Decline Further, But Not for Long

Oil prices hit a three-month low of $118 a barrel on Tuesday, prompting some analysts to say oil's six-year rally has run its course—but only for now.

Oil sank to its lowest level since May 5, more than $29 or nearly 20 percent below its record of $147.27 on July 11.

"Prices have peaked short term," said Mark Mathias of commodity fund manager Dawnay Day Quantum.

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"I am still a buyer at much below $120, on a 12-24 month view. We may see $150 this winter, but I would be more confident about that on a two-year view."

Evidence that fuel demand in the United States and Europe has fallen in response to high prices and slowing economies, together with rising crude oil supply from exporter group OPEC, have pressured the market.

Forecasters such as the International Energy Agency expect world demand growth to slow next year.

The Organization of the Petroleum Exporting Countries has been pumping at a higher rate for the last three months, with the bulk of the increase provided by Saudi Arabia, a Reuters survey found on Monday.

Below $100?

U.S. crude futures first topped $100, a once unthinkable price, in January.

Oil tycoon T. Boone Pickens said last month prices would not ever fall below $100. Others are not so sure, provided this year's hurricane season does not disrupt oil supply in the U.S. Gulf of Mexico and tension in the Middle East does not halt shipments from there.

Weaker consumer sentiment also has pushed oil prices lower, as Nicholas Brooks, of ETF Securities, explains in video at left.

"We could see $100 in the next two months at the rate we're falling," said Simon Wardell, analyst at Global Insight. "Short of problems in the Middle East or hurricanes, I think we're going to continue to fall."

The pace of the drop from the record high has left some believing the market could easily fall further.

"I think below $100 could be a possibility in the next two months," said Christopher Bellew, broker at Bache Commodities. "It's dropped nearly $30 so far from the highs so it's only got to go another $18."

Technical analysts, who use past price moves to predict future direction, said the recent decline may have further to go, but the longer term uptrend is still intact.

"We expect the downward correction to continue in the near term before fundamentals reassert," said Jonathan Waghorn and Mark Lacey, co-portfolio managers of the Investec Global Energy Fund. "We believe that the crude price could test levels closer to $110 or below in the near term."

Oil's run up has been partly fuelled by concern over whether long-term supply will be adequate to meet demand given years of underinvestment in fields and refineries and evidence crude supply from some regions has peaked.

Goldman Sachs

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[GS  Loading...      ()   ], one of the most active investment banks in commodities markets, has predicted oil could reach $200.

Harry Tchilinguirian of BNP Paribas said that supply and demand trends remained supportive. While OPEC supply is up, violence has shut some output in Nigeria and Russian output is stagnating so far in 2008.

"We still perceive nothing has changed," said Tchilinguirian. "Fundamentals are still looking strong."

His bank has forecast U.S. crude will average $141.30 in the third quarter.