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Predictions of slump in demand hits oil companies

January 22, 2009

Motorists in Britain might be grumbling as petrol prices begin to nudge up again, but analysts have some good news for them: the slump in oil demand this year is likely to be bigger than expected.

That is bad news for the oil companies, of course, and HSBC is predicting that cashflows at Shell, for one, will be negative for the next two years. As a result, its shares slid 44p to £16.11. Cairn Energy also fell – 47p to £17.33 – and BP dropped 12¼p to 485¾p. All that was enough to drive the FTSE 100 down 31.52 points to 4,059.88.

According to Reuters, analysts are predicting an average decline in demand of 430,000 barrels per day this year to 85.43 million barrels, compared with a fall of only 20,000 that had been predicted in November.

Majors such as Shell and BP have been gambling on a recovery in the oil price by storing it in offshore tankers, but there is no sign of an oil price recovery. Richard Savage, a Mirabaud analyst, said that oil might never recover to the heights it reached last summer, given that Americans – who burn a quarter of the world’s oil – are now buying smaller, more fuel-efficient cars and President Obama is backing renewable energy.

HSBC analysts said that Shell’s operating cashflow would fall by $7 billion this year from last, while its capital expenditure would rise by $3 billion. It was still a “buy”, though, because of its strong balance sheet.

The possible need for cash for mid-cap oil companies was highlighted by Tullow Oil, which raised £400 million in a share placing via RBS and Merrill Lynch. It said that it was abandoning its attempt to sell its stake in a Congo (Brazzaville) oilfield to South Korea for £317 million. Tullow defied the sector, rising 25p to 625½p, as analysts said that the cash should help banks to sanction a crucial loan to finance production off Ghana.

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