LONDON : Demand for oil will stay on the downtrend in 2009.

And according to market watchers, that will keep the lid on oil prices in the year ahead.

But they also note that the OPEC oil cartel seems keen to cut production, and that may send crude futures ticking upwards.

The OPEC oil cartel recently announced plans for a record cut in output, saying it will take some 2.2 million barrels a day away from the markets.

But with oil prices going below US$35 dollars a barrel after the announcement, the oil cartel said it is ready for further cuts.

Crude futures are now at their lowest in about four years, and way below their all-time peaks at above US$147 dollars a barrel in July.

Demand has been hit by the the gloomy global economic outlook and credit crunch, causing commodity prices to fall.

Simon Wardell, IHS Global Insight, said: "It comes down to the credit crunch, both in the up phase and down phase. As we were going up, there was a lot of concern over supply and the rate of growth for demand, but there was also another factor that came into play, a lot of money was shifting into commodities because it was looking for a return, and that goes back to 2007 when we had the problems in the financial markets; equities were not making much capital, not returning, so a lot of money moved into commodities and that helped inflate the price as it rose."

But the bubble burst in July, when investors fled commodity markets, as the extent of the US sub-prime mortgage market collapse began to emerge.

Professor Paul Stevens, Royal Institute of International Affairs, said: "Previously the adjustment was (from a) much lower starting point. For example, at the end of 2006, the oil prices came (down to) US$20 from a peak of about US$75. In August 2008, it came off US$40 from US$145 a barrel. (There is) nothing new about this, the question is whether OPEC can keep its nerve."

For prices to stabilise, some market watchers said OPEC will have to show its determination to cut supply.

But by its own admission, the oil cartel is expecting demand to slide even further over the next year - to average 85 million barrels per day by end of 2009.

And crude futures may fall in tandem.

Mr Wardell said: "We think there is a little way to go; in 2008, we have seen prices swing by US$100 a barrel but in 2009 we may see, (in) the second quarter, (prices) down to US$40 a barrel, maybe even the mid 30s, and we think that it will take that drop before we start to see things begin recover in the second half, as the economy begins to expand."

However, some said prices may push upwards, if OPEC output cuts are big enough.

Professor Stevens said : "In 2009, we will see continued prices weakness in first half or quarter of year. A lot depends on demand and that depends on the nature and depth of the economic recession...if demand does not completely collapse, my guess is that as we move through 2009, as OPEC's determination to defend its price bears up, then prices will creep up to US$70, to US$80 that they want."

Of course all this comes with an important caveat. Any geo-political upheavals will scare markets and push oil prices up again.

However the global downturn affects everything.

What can be said with some confidence is that 2009 is likely to be another turbulent year for oil prices. - CNA/ms