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The Scotsman: The inexorable rise of oil prices may not be a long-term factor: “Phil Roberts, a technical analyst at Barclays Capital, said the longer US light crude topped $47, the stronger the signs that the market is building up to a "classic commodity spike", with $70-75 suggested as a top level.”: “The world’s largest oil companies - among them BP and Shell - are under pressure to book new reserves, particularly at a time of high oil prices.” (



Tue 12 Oct 2004


CRUDE futures are continuing to notch up new highs, and technical analysts are now predicting that oil prices could break the US$70-a-barrel barrier on this run which has already seen prices more than doubling since the run-up to the Iraq war last year.


Last week saw US light crude lead the bull run on the New York Mercantile Exchange (NYMEX) into the mid-US$50s, with European benchmark Brent just $3 or $4 behind. Predictions that the oil price would stall at $40, then $45 and then $50 a barrel have all fallen by the wayside and, for analysts, charting new peaks has become an almost daily occurrence.


Phil Roberts, a technical analyst at Barclays Capital, said the longer US light crude topped $47, the stronger the signs that the market is building up to a "classic commodity spike", with $70-75 suggested as a top level.


"The market still looks extremely strong, and it doesn’t look like this trend is over," says Roberts. "The price is pushing on towards $60, and it is quite possible that it could reach $70 within the next six months."


Oil futures are moving into uncharted territory, encouraging investors to look towards technical analysis, where the price is charted to identify the timing of peaks and troughs, to guide their next move.


US light sweet crude reached new highs of $53.69 a barrel yesterday, while Brent crude, the European benchmark, powered through the $50 milestone to an all-time high of $50.62.


Crude oil futures have shot through the roof since the beginning of this year, driven by strong demand in Asian economies with suppliers struggling to keep up. With OPEC producing almost flat out, short-term disruptions to supply in the approach to the northern hemisphere’s winter have played a pivotal role in pushing prices to record highs.


Hurricanes that have swept across the Caribbean have disrupted operations in the Gulf of Mexico - home to 25 per cent of US production - and there is little sign of relief until the storm season blows over towards the end of October.


While OPEC kingpin Saudi Arabia has attempted to cool the market by pledging increased crude supplies, the Middle Eastern producer is struggling to find buyers for its heavy crude, as refiners seek the higher-quality sweet crude.


Analysts expect little let-up over the cold season, but say that prices could drop down to more sustainable levels by the second quarter of 2005.


"I would expect to see [futures] return to their old historic highs of around $40 a barrel," says BarCap’s Roberts. "If it goes straight to $75 [on this run], it is more likely to come back down very quickly, but if it goes slowly to $60 up to the end of this year, then it is more likely to go on up."


HSBC’s Robin Griffith says: "We are now in the blow-off period. We are already on a run that is not sustainable. While the current run may get to $52, even $58 [for Brent crude], it will come down again. We are realising that we won’t be held to ransom by a shortage of oil."


But other analysts are more bearish, arguing that $50 is unsustainable, even in the short-term. ING analyst Angus McPhail says: "$60 is not really very realistic. It is an oil price bubble and at some stage that bubble will burst."


Nevertheless, demand appears sustainable, with Asia expected to pick up where the West is dropping off. "China has no strategic reserve but would like one. There will be buyers on a substantial dip, so [Brent] will not drop below $40. The long-term trend will resume at those levels," adds Griffith. "It is Mickey-Mouse land to suggest that oil could return to $25."


High oil prices are already beginning to affect economic forecasts. Last week, a senior official at the International Monetary Fund (IMF) said surging oil prices had undermined its outlook for global growth. US treasury secretary John Snow added to the gloom. "[High oil prices] are creating headwinds for the otherwise very strong economy."


Economic models are fast becoming redundant. "If the oil price was to rise by 50 per cent, the impact on the global economy would be to subtract 0.3/0.4 per cent off GDP growth over one year," says Julian Callow, an economist at BarCap.


Since January, oil prices have risen by nearly 80 per cent from around $30. If futures were to hit $60, representing a 100 per cent increase, it would shave 0.8 per cent off global GDP growth. "But we have seen a sharp rise in long-dated oil forward prices, suggesting a greater impact than is historically the case," says Callow.


Meanwhile, global GDP is expected to grow at its fastest rate in 30 years, with 4.5 per cent to 5 per cent forecast for 2004. Rising crude prices are backed by rising demand, a typical sign of a healthy economy.


Added to that, many consumers are much less dependent on oil as a factor in GDP growth than during the oil shocks felt in the late 1970s, where in adjusted-inflation terms, the price of oil outstrips the levels seen today.


The US uses half as much oil as it did in the 1970s to produce one unit of GDP. So where the US and Europe can shake off some of the impact of sustained highs, energy-dependent China is much more vulnerable.


"If we had $50 plus for a whole winter, it would lead to a dramatic slowdown in the global economy, lower growth in China next year with other less robust Asian economies slipping into recession," says Julian Lee, an analyst at the Centre for Global Energy Studies.


HSBC’s Griffith is more cautious: "Relatively recessionary conditions will be triggered, but it will be very mild. Petrol is still dirt cheap."




GLOBAL oil majors are spending more on upstream exploration than ever before, but investment is failing to reap the rewards, claims a new report from energy consultants Wood MacKenzie.


Energy companies invested £27.5 billion in the development of upstream oil projects in 2003, up from about £19.3bn spent in 1998, but have failed to capitalise commercially on oil and gas finds.


The ten largest oil groups shelled out around £4.5bn on exploration last year, but commercial discoveries had a net value of only about £2.2bn, said the Edinburgh-based consultants.


Robert Plummer, corporate analyst at Wood Mackenzie, said: "The problem is [that] exploration has not been generating returns."


The world’s largest oil companies - among them BP and Shell - are under pressure to book new reserves, particularly at a time of high oil prices.


Record oil prices, currently trading at over $53 a barrel, are expected to impact on exploration budgets as analysts predict crude futures to remain buoyant into next year.


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