The new boom: price of oil posts largest rise for a decade

Brent crude jumped by $1 yesterday to pass $66 for the first time since October

By Sarah Arnott

Saturday, 30 May 2009

London Brent Crude jumped by more than $1 yesterday, passing the $66-per-barrel mark for the first time since October and completing a mini-boom for May, which saw the fastest monthly oil price rise in nearly a decade.

Oil has already nearly doubled its price so far this year, after plummeting to below $35 per barrel in December from its all-time $147 high last July.

It could yet rise higher. Abdalla el-Badri, the secretary general of the Opec oil producers' cartel, predicted this week that prices could reach $75 by the end of the year. Ali al-Naimi, the Saudi Arabian oil minister, predicted as much as $80 thanks to rising economic optimism and concomitant demand growth, particularly in Asia.

The outlook is sufficiently optimistic that the 12-strong cartel agreed at its quarterly meeting in Vienna this week that there is no need for further production cuts to shore up the price. Some 3.2 million barrels per day (bpd) of cuts were agreed in three tranches last autumn, in an attempt to put a floor under the collapsing price. Even though not all Opec members are pulling their weight – with Iran and Angola in particular understood to be cashing in on their counterparts' efforts – the price is nonetheless rising satisfactorily.

Reduced supply is not the only fundamental at work. Since the slump last autumn, lack of economic confidence has led refinery customers to draw on their own supplies rather than buy any more. But inventories are finally running low and data from the US government this week showed the country's crude stocks down by 5.4 million barrels in the previous week alone, as refineries up their output ahead of the summer.

But even with some early signs that the worst of the global slump may be over, most commentators are far less bullish than Opec on the timing of any recovery. The International Energy Agency (IEA), for one, paints a far gloomier picture. As recently as this month, the research group revised further downwards its forecasts for world oil demand this year, predicting a faster annual drop than at any time since 1981. Cutting another 160,000 bpd, the IEA now expects demand to come in at 2.56 million bpd lower this year than in 2008.

The economic outlook remains grim, with global GDP expected to contract by as much as 1.3 per cent this year according to the International Monetary Fund. And there is still considerable oversupply of oil, with between 100 million and 130 million barrels-worth stored on tankers offshore. Manouchehr Takin, a senior analyst at the Centre for Global Energy Studies, said: "With the fundamental outlook on the economy weak, with demand sluggish, and with so much oil available in storage, the basic view is that the price should not be high. But it is."

Paper investments – widely blamed for last year's price bubble – are the likely culprit once again. While Opec's production cuts might account for a price back up towards the $50 mark, the rest is down to institutional investors, say experts. Fund managers with billions of dollars to spend are wary of volatile stock markets, but the money has to go somewhere and commodities of all kinds are seeing a boost.

For oil, the fact that futures prices are higher than spot is also helping to draw in speculators.

But the situation is unlikely to continue as the reality of the economic problems sink in. "The Opec price forecast is not likely, because stock markets will become more reliable again and draw investment back, while the fundamentals are likely to remain weak and keep demand down," Mr Takin said.