Oil prices not in line with weak demand, experts warn

Abu Dhabi: The recent spike in international oil prices is not supported by the fundamentals of demand and supply, rather it's speculators who are driving the oil market rally and a major correction in prices looks imminent if oil demand worldwide doesn't pick up near term, experts say.

So far, there has only been a fragile recovery in the real economy from the aftershocks of the global financial crisis and for oil prices to be sustained at current levels or higher, the global economy should continue with its momentum of growth, the experts added.

At present though, major consuming countries such as the US are dealing with increasing oil inventories and the world's major crude exporters such as Saudi Arabia are saddled with excess capacity, which collectively is nearly 6 million barrels per day.

Logically that should depress prices, but it doesn't seem to be happening. Not for the moment, at least.

"The oil markets are moving higher despite weak fundamentals," said Kate Dourian, Middle East Editor of global energy information provider Platts.

Speculators are driving oil markets up to make a quick buck as the dollar falls since a weakening dollar makes commodities priced in the greenback cheaper.

Friday, on the New York Mercantile Exchange, crude oil futures for Dec-ember delivery traded at a high of $81.50 a barrel in early trade, the highest in more than a year. Oil prices are rebounding from lows of $33.40 a barrel touched in December 2008.

Surplus stocks

"Speculators are betting on continued robust Asian demand, mainly from China. Oil prices are going up because at current prices the commodity looks attractive to a trader for making a quick profit," said Dalton Garis, Associate Professor of Economics and Petroleum Market Behaviour at Abu Dhabi's Petroleum Institute.

"However, next year the oil market is likely to become tighter when there's a fundamental increase in demand on a better economic outlook. If the surplus quantity of oil falls below 2 million barrels per day, that would probably get the market scared and it would start demanding a risk premium, which could well see prices increasing by up to $30 a barrel within a couple of months," he added.

The scenario of an oil shortage amid rising demand next year looks real as some producers have cut back investments in new capacity due to lower prices.

Thirty per cent by value of hydrocarbon projects in the Gulf Arab countries have been put on hold or cancelled, according to a recent report published by Dubai-based research house Proleads Global.

"The scaling back of investments in new capacity means that when world oil demand returns next time, we might see significant shortages in supply which might lead to major increases in the prices of hydrocarbon commodities," Emil Rademeyer, Director of Proleads, told Gulf News.

Dourian said oil prices must remain above $60 a barrel to sustain the level of investment in new supply or else we could well be in for a supply crunch. "The era of cheap oil is over," she said..

Mohammad Amerah, an Abu Dhabi-based economist, said oil prices may go back to $70 a barrel after the winter demand for heating oil in the northern hemisphere abates in the next few months.

"However, the global economy is picking up steam and should the pace of recovery continue in the coming quarters, it will help support higher oil prices."