Oil can fall further if credit stays tight

By Richard Mably

LONDON (Reuters) - World oil prices are likely to fall further if the rush to cash across global financial markets continues but crude is unlikely to dip for long below the oil industry's $50-a-barrel average operating cost, analysts said.

Benchmark U.S. crude has fallen 45 percent from July's record $147.27 a barrel to trade at $81 a barrel Monday after settling at $77.70 on Friday, its lowest close in 13 months.

"We believe the deepening banking sector crisis and the significant slowdown in global growth that lies ahead will continue to put downward pressure on commodity prices," said Deutsche Bank in a report released on Friday.

"A combination of fear, de-stocking and disruptions across the supply chain owing to frozen credit markets is currently depressing oil demand far below where underlying economic fundamentals would suggest," Goldman Sachs said on Monday in a note to clients.

Goldman said it expected crude to average $75 in the fourth quarter and end the year at $70, but added: "Should the financial and economic crisis cut deeper into demand, the market could fall as low as $50 a barrel."

That is the price threshold that is widely considered to be the average operating cost, or "cash cost", for the world's oil major oil companies.

The average cost for the most expensive new projects -- known as the marginal cost of production -- is about $75-$80 a barrel, according to London-based analysts Bernstein Research.

"In the long run we continue to believe that oil and gas prices will trend up in line with the marginal cost of supply," said Bernstein.  Continued...