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Oil’s Outlook Darkens

Ruthie Ackerman10.11.08, 3:00 AM ET

Although oil prices have tumbled by almost half since approaching $150 a barrel in July, it looks like black gold still has further to fall.

On Friday, the Paris-based International Energy Agency slashed its global oil demand forecasts for 2008 by 240,000 barrels per day, to 86.5 million barrels, and said demand would weaken in 2009 by a further 440,000 barrels per day, to 87.2 million barrels. (See ” Commodities Get Crushed.”) The agency said that tightcredit conditions were also starting to cut into supply by slowing the investments of oil producers. The cuts come on top of ones the IEA made last month, which leave the forecast for global oil demand growth at 0.5% this year and 0.8% next year.

MF Global energy analyst Andrew Lebow said he — and likely the market — strongly expect the IEA to further revise demand estimates downward in the coming months.

Lebow said he believes the Organization of Petroleum Exporting Countries will probably reduce production at their meeting in November, but he thinks oil demand will fall faster than OPEC can cut. “It’s not clear whether the decision will have any effect on the market,” he said. (See ” Oil: Cut, Baby, Cut.”)

OPEC will need to revive demand. “We now know that the global economycouldn’t really handle prices above $100 and OPEC will have to figure out a price the economy can handle,” Lebow said.

Oil prices have further to fall as the global economy and the credit market constriction wreak havoc on demand.

Exxon Mobil (nyse: XOM – news people ), a bellwether in the oil sector, didn’t take the news well, tumbling 8.3%, or $5.64, to $62.36, at the close. Exxon shares have fallen 33.4% since the beginning of the year. In comparison,Chevron (nyse: CVX – news – people ) sank 9.6%, or $6.17, to $57.83; Royal Dutch Shell (nyse: RDSA – news – people ) slid 5.8%, or $2.74, to $44.70; and ConocoPhillips (nyse: COP – news – people ) plummeted 10.4%, or $5.60, to $48.23.

While Exxon’s price-to-earnings ratio is 7.8, Benchmark analyst Mark Gilman says that number, which is based on oil at $100 a barrel, is misleading. With oil at $80 a barrel, the ratio doesn’t look as good, since Exxon’s earnings would decline. If crude falls to $50 a barrel, which is what Gilman predicts will occur, the ratio will climb even higher.

Gilman has a “buy” rating on EnCana (nyse: ECA – news – people ),Devon Energy (nyse: DVN – news – people ), Total (nyse: TOT – news people ) and Royal Dutch Shell, which have more favorable valuations compared with the rest of the sector.

Light, sweet crude for December delivery fell $8.63, to close at $77.99 per barrel, falling significantly from its high of $147.27 in July. (See “Stocks Down Globally; Oil Below $80.”) United States Oil Fund (amex:USO – news – people ), an exchange-traded fund that tracks oil prices, lost 4.5%, or $3.10, on Friday, falling to $66.50.

The Associated Press contributed to this article.

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