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Oil stocks dive on falling demand worries

January 21, 2009

Cairn Energy fell 7 per cent , BG lost 5 per cent and BP 4.6 per cent as the latest poll of analysts predicted a sharper contraction in demand for oil this year than expected two months ago as the world economy slips into recession.

A Reuters poll of 10 banks predicts an average decline in demand of 430,000 barrels per day this year to 85.43 million barrels, compared to a fall of only 20,000 expected in November, which would mirror the 2008 decline.

Shell fell 3.4 per cent as HSBC analysts predicted it was in for a cash squeeze. It said that its operating cashflow would fall by about 16 per cent from last year of $7 billion while its capital expenditure would rise by $3 billion, giving it negative cash flow this year and next, although it said that its strong balance sheet should be able to take the strain and it maintained an “overweight” advice on the shares.

The fear is that the oil price will never recover to the heights it reached last summer as consumers switch to smaller more fuel efficient cars and the proportion of renewable energy consumption increases.

The possible need for cash for oil companies was also highlighted by Tullow Oil, which announced a £400 million share placing to help it to secure a refinancing of its debt to bring its Jubilee oil field off Ghana into production.

Tullow gained 5 per cent as analysts said that a refinancing deal now looked almost certain to be agreed.

Banks continued to dive on fears of nationalisation with Barclays taking the strain today, off 20 per cent at 58.5p, amid reports that investors were demanding an early trading statement. Lloyds was down 12.5% and RBS, which bore the brunt of selling on Monday after its profit warning was actually up 7 per cent at 11p.

ICAP, the interdealer broker, lost 6 per cent after going ex-dividend.

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