Merrill Lynch warned that oil prices could fall as low as $25 a barrel next year if the recession affecting the US, Europe and Japan extended to China, the main driver of demand growth in commodity markets in recent years.

Merrill's warning came as oil prices sank below the $44 a barrel on Thursday, the lowest level in almost four years, in spite of dramatic interest rates cuts in the UK, Europe and Sweden.

Francisco Blanch, head of commodities research at Merrill Lynch, said his main scenario was for oil prices to average $50 a barrel next year, but warned: "A temporary drop below $25 is possible if the global recession extends to China."

Nymex January West Texas Intermediate traded $2.75 lower at $44.04 a barrel, recovering from a low of $43.79 a barrel, its weakest level since January 2005.

ICE January Brent fell $2.69 to $42.78 a barrel.

"In the short run, global oil demand growth will likely take a further beating as banks continue to cut credit to consumers and corporations," Mr Blanch warned in Merrill's global outlook report for 2009. He said oil prices were likely to bottom in the first half of next year and start a gradual recovery from June 2009.

Meanwhile, US wholesale petrol prices dropped below the $1 a gallon level. Nymex January RBOB gasoline fell 5.6 cents to 98.55 cents a gallon yesterday, the lowest level since the contract started trading in 2006.

US wholesale petrol prices, which last traded below the $1 a gallon level in January 2004, have sunk almost 73 per cent since reaching a record $3.6310 in July.

Government data shows the nationwide average for US retail petrol prices has dropped to $1.81 a gallon from a peak of $4.114 in July, a decline of 56 per cent.

Merrill Lynch warned that refiners profit margins (known as "crack spreads) for producing petrol could weaken further as motorists cut back on driving. Nymex RBOB January gasoline crack spread remained in negative territory yesterday at -2.85 a gallon.

In the base metals market, aluminium prices sank below the $1,600 a tonne level , reaching a four-and-a-half year low, amid mounting gloom about the outlook for prices and the future of the industry.

The benchmark London Metal Exchange three-month aluminium contract sank 2.2 per cent to $1,580 a tonne yesterday, the lowest level since May 2004. Aluminium has fallen 53.2 per cent since hitting a record $3,380 a tonne in early July.

Stocks of aluminium at LME warehouses increased by a hefty 19,500 tonnes yesterday and have risen to 1.86m tonnes, the highest level for fourteen years.

Rising inventories, which reflect the deepening downturn in global industrial activity, particularly in the carmakers and construction sectors, have weighed heavily on aluminium prices.

"The industry is struggling to cope with both an overhang of spare capacity and a huge level of unconsumed inventory," said Dan Smith, metals analyst at Standard Chartered.

An estimated 65 per cent of aluminium smelters worldwide are estimated to be losing money at current price levels.

Although US and Chinese producers have made substantial cutbacks in output, Mr Smith said further reductions in capacity were needed.

"Capacity cuts will continue at a fairly rapid pace, which should combine with an improvement in demand from the middle of next year," said Mr Smith who cautioned that the stock overhang was likely to limit any recovery in prices.

Standard Chartered is forecasting that aluminium prices will average $1,825 a tonne next year, rising to $2,000 in 2010.

Meanwhile, copper dropped 5.7 per cent to $3,250 a tonne (sinking below $1.50 a pound, a key psychological level for many in the industry), a fresh three-and-a-half year low.

Lead inched 0.5 per cent higher to $976 a tonne after a sharp fall in the previous session which dragged the grey metal below the $1,000 level for the first time since June 2006. Lead stocks are likely to rise further as demand for new batteries from carmakers is expected to remain weak while an important disruption on the supply side this year is beginning to ease.

The state government of Western Australia has granted Canada's Ivernia permission to ship 8,000 tons of lead concentrate stored in Esperance harbour after exports were halted last year by environmental problems. Ivernia is still waiting for an export licence to ship another 21,000 tonnes of lead concentrate from the port of Freemantle.

Gold traded in a narrow range, easing 0.1 per cent to $771.50 a troy ounce

Copyright The Financial Times Limited 2008

• Oil: Key Players and Movements [MAP]