International oil prices may fall to a low of US$25 a barrel in the second quarter and average US$35 this year, as supply cuts fail to offset a sharp and sudden demand plunge, according to Morgan Stanley.
The United States-based brokerage's forecast, one of the most bearish views given by analysts, comes amid daily news of lay-offs and losses suffered by major companies and announcements of government economic stimulus measures.
Analysts have made a wide range of oil price predictions, depending on their view on the depth and duration of the global economic slump, and their expectations on the pace at which demand and supply will fall.
'We think that the oil markets are lagging the macro economists in understanding the severity of the economic outlook,' Morgan Stanley said in a research report. 'As they catch up and as the full extent of the demand weakness becomes clear, we expect prices to move lower.'
It said its forecast was based on expectation that 'global demand is poised to post its largest year-on-year contraction since 1982 on a sputtering global economy', adding that supply cuts will be 'a longer-term issue' and a 'non-issue in 2009'.
The gloomy prediction came after the International Monetary Fund slashed its estimate on this year's global economic growth to 0.5 per cent from 2.25 per cent.
The drastic economic turmoil saw rival Goldman Sachs cut its calculation on this year's oil price from US$123 to US$86 in mid-October, and then to US$45 in mid-December.
Merrill Lynch early in December slashed its forecast for this year to US$50 a barrel from US$90 predicted on October 1.
New York crude futures have averaged US$41.78 a barrel year to date, with market close prices ranging between US$35.40 and US$48.80. They closed at a five-year low of US$33.87 on December 19.
Morgan Stanley projected oil demand to fall 1.5 million barrels per day this year after a 300,000-barrel decline last year, during which about 86 million barrels were consumed.
In a bid to arrest the price slide, since September, the Organisation of Petroleum Exporting Countries (Opec) has announced targets to cut production by a total of 4.2 million barrels per day. The oil cartel accounts for about 40 per cent of world oil output.
Victor Shum, a Singapore-based senior principal at energy industry consultancy Purvin & Gertz, said oil tanker movement data and anecdotal reports suggested Opec producers might have so far achieved a more than 75 per cent compliance rate, although this could not be confirmed until more concrete data was released next month.
'There is uncertainty as to how long Opec will continue to be successful in sticking to its planned output,' he said, adding he expected oil price to average US$45 a barrel this year. Morgan Stanley estimated spare production capacity at Opec nations would surge to 5.6 million barrels per day this year from 3.1 million barrels last year and 2 million barrels in 2007.
The thin spare capacity was a key excuse for speculators and traders to push up oil prices in the past two years.
The economic crisis has had a dramatic effect on global oil demand, which has seen the price drop from a record of almost US$150 barrel in July to below: US$40