Merrill Lynch: Oil could drop to $25 per barrel

Just a few days after Iran's president said Iran's budget would have to be reworked on the assumption of an oil price of $30 per barrel, Merrill Lynch says oil could drop to as low as $25 per barrel.

Oil prices are likely to keep falling until well into next year and could reach $25 a barrel before recovering, U.S. bank Merrill Lynch has said.

In a research report published on Thursday, it said oil prices should begin to rally in the second half of 2009.

Merrill Lynch recently cut its forecast for the average price of U.S. crude oil futures and North Sea Brent crude oil to $50 a barrel from a previous estimate for both crudes of $90.

"With demand vanishing across all key oil consuming regions, benchmark crude oil prices continue to plummet," it said. "In the short-run, market participants will focus on both OPEC and perhaps even non-OPEC producer responses to balance the market."

"A temporary drop below $25 is possible if the global recession extends to China and significant non-OPEC production cuts are required," it said.

The article goes on to forecast an increase in demand and market prices in the second quarter of 2009.

Since the market price of oil represents a fixed percentage of the price of gasoline, I guess we can expect a diminishing effect on the price we pay at the pump, but on that front it's still good news.

One negative aspect of this is that these low oil prices inhibit the drive toward increased domestic production of oil; it simply costs more to drill here in the US than it does in many other parts of the world. Another possibility is that states and the federal government might see this as an opening to increase taxes on gasoline.