The Energy Report

Until recently analysts believed that the red-hot economies of the developing world, particularly China, would more than compensate for the reduced consumption of oil in the U.S. and Europe. A stream of bad news reflecting a sharply slowing global economy now suggests otherwise.

OPEC President Chakib Khelil believes that the global recession could slash 1.4 million barrels per day (mbpd) of demand in the first half of 2009, as China's economic growth rate fell from 12% to 9% in the third quarter, the slowest pace in five years. The country has ceased gasoline imports altogether, and cut its diesel imports in half.

Financial forecasters have downwardly revised their oil price targets. Merrill Lynch analyst Francisco Blanch, who correctly predicted that oil would spike to the $147 region this year, slashed his forecast to $25 for 2009 if the global contagion extended to China. Analysts at Goldman Sachs predicted $30 oil in the first quarter of 2009, and a Deutsche Bank analyst cut his estimate to $47.50 for 2009.

OPEC members need at least $70–$80 a barrel to sustain investment and meet budgetary needs, according to Khelil. It has been vigorously lobbying Russia, the world's top oil producer, to cut its output by 500,000 barrels per day as well. The nation is also reportedly considering joining OPEC.

The slowdown in production has oil companies worried about what will happen when the global economy recovers. Royal Dutch Shell vice president Marvin Odum warned, "We're in remission right now," he said, but when oil demand rebounds, "the energy challenge will come back with a vengeance."

At the ridiculously low valuations of some of the best names in energy, I think the time is ripe for a wave of mergers and acquisitions, as the top dogs seek to increase their market share-and their reserves numbers-to get positioned for the next bounce. The ones with the healthiest balance sheets and the most strategic reserves are now looking like easy triple-baggers when that time comes.