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Reuters: Oil, at $100, seen heading even higher

Thu Jan 3, 2008 10:50am GMT
By Alex Lawler

LONDON (Reuters) – Oil prices, which on Wednesday hit $100 a barrel for the first time, will probably go up further in the next five years unless economic growth falters and slows fuel demand.

Falling production in some areas outside OPEC, robust growth in demand led by countries such as China and a strain on oil refineries to make fuels from crude are likely to extend a rally that began in 2002.

“Oil could rise further from here,” said Kris Voorspools, analyst at Fortis in Brussels. “It’s simple supply and demand fundamentals.”

“Demand is going up and I think there is a structural problem with the refining sector. There’s higher demand for higher-quality products and refineries are simply not up to making those kinds of products.”

The surge to $100 for U.S. crude on Wednesday has brought oil near the inflation-adjusted record peak of $101.70 hit in 1980 when war between OPEC members Iran and Iraq triggered an oil supply crisis.

“We find it difficult to contemplate any scenario which doesn’t see annual average prices going steadily higher,” said Kevin Norrish, analyst at Barclays Capital in London.

“This is driven by the same trends that have been in place — acceleration of decline rates in mature non-OPEC producers outside the former Soviet Union. Demand growth is continuing to be stable, despite high prices.”

Supply restraint by the Organization of the Petroleum Exporting Countries helped prices to rise by nearly 58 percent last year, the biggest annual gain this decade.

OPEC, source of more than a third of the world’s oil, says it cannot do much to lower prices because most members of the 13-member group are producing as much oil as they can.

“OPEC can do little,” Shokri Ghanem, the top oil official for OPEC member Libya, told Reuters by telephone soon after oil reached $100. “Most OPEC countries are producing at capacity.”


A weakening U.S. dollar, political tension in the Middle East and oil’s growing appeal to financial investors have also fuelled the price run up.

“All of the factors that pushed us above $80 are now moving us higher,” said Peter Beutel, analyst at Cameron Hanover.

“Until we get more supply or demand starts to take a hit, there is no reason we can’t see any number.”

So far, the world economy has coped with ever-rising prices but others in the industry say the jury is out on whether the latest surge will put a brake on growth and curb demand.

“You can make a case either way,” said Nauman Barakat, senior vice president at Macquarie Futures USA, when asked in which direction prices will head in the next three to five years.

“Prices could be a lot higher because of continued strong demand from Brazil, India and China, but on the other hand they could be a lot lower because these kinds of high price levels could cause a global recession.”

Most forecasts, however, expect demand to continue to rise.

The International Energy Agency, in its annual World Energy Outlook released on November 7, maintained a forecast for global oil demand growth of 1.3 percent a year to 2030, despite raising its price forecasts.

The agency, adviser to 27 industrialised countries, said a supply crunch in the period to 2015, causing an abrupt price rise, could not be ruled out.

“The age of cheap oil is not there any more,” Libya’s Ghanem said.

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