Oil price dived almost 10% to settle at 36.22 yesterday amid investors' worry on demand destruction. Although the OPEC agreed to cut production by 2.2M bpd, the biggest reduction in more than a decade, economists were not optimistic on its ‘power' to rescue oil's decline. Over the week, the benchmark futures should probably fall by 15%, the second largest weekly decline in 5 years.

On Wednesday, the US Energy Department reported higher than expected crude inventory for the week ended Dec 12. On Dec 9, the Department said that global oil demand will fall 0.5% to 85.3M bpd. The estimate is consistent with OPEC's forecast that world oil consumption in 2009 will fall by 0.2% to 85.68M bpd.

Looking at futures market, Feb 09 contract is trading at a premium $6.17/bbl to Jan 09 contract. This is the biggest premium between the two most-active contract months in more than 20 years. Contango signals the high inventory situation in the current crude oil market.

Table 1 shows 2009 oil price forecasts from some brokers after OPEC’s cut.

Dragged down by plunge in oil price, gold price gave up 3-4% of the gain and retreated to 850 level. In near term, the precious metal's performance should remain volatile. While demand increases, profit-taking/liquidation of positions may make any rally unsustainable. Moreover, we have monitor the Fed's movement on monetary policy as change in interest rate and money supply directly affect the dollar and hence on gold.

Table 1: 2009 Oil Price Forecast
$/bbl2009 WTI crude oil
Deutsche Bank47.5 but has risk to fall to 30 temporarily
Goldman Sachs65 (can fall to 30 in 1Q09)
JP Morgan43 (revised down from 69)
UBS60