New Oil Forecasts Looking Much Lower (OIL, USO, OIH, XOM, CVX)

A new forecast from Bank of America Merrill Lynch is lowering the expected 2010 target oil demand growth from 2 million b/d to 1.5 million b/d. The bank also cut its crude oil price forecast by more than 15%, from $92 per barrel down all the way to $78 per barrel for the second half of the year.  The lowered forecasts will have an impact on major oil company shares and on several ETFs that track the crude oil market. The iPath S&P GSCI Crude Oil TR Index ETN (NYSE:OIL), the United States Oil Fund, LP ETF (NYSE:USO), and the Oil Services HOLDRs ETF (NYSE:OIH).

Declining demand is attributed to weak growth in Europe as consumers use less oil. The demand for oil is also a proxy for investment growth, which the bank is also targeting for a more “muted recovery.”  BofA sees the weakening of the euro versus the dollar as “a deflationary event” that will lead to a weaker dollar-based global economic recovery and lower prices for crude.

In the US, demand growth for crude oil is negative. The price spikes of 2008, when gasoline topped $4/gallon, has changed Americans’ habits. US drivers are driving fewer miles compared with the peak years of 2006-2007. As we noted yesterday, even previous recessions did not tamp down the number of miles driven in the US in the way the current slump has done.

A big part of that change in driving is due to unemployment levels approaching 10%, or 16%-17% if people who have given up looking for work are counted. There is little reason for these folks to drive anywhere, except to the infrequent job interview. Cash that was once spent on gasoline now goes to pay for shelter and food and other necessities. Driving is not a necessity.

Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) shares are down about 2% in early trading this morning. The shares of OIL, USO, and OIH are all down around 3% as well.

Paul Ausick