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Beware the 'super spike' (1)

OIL PRICES continue to break records. At press-time, US futures had moved above $129/b for the first time and some influential investors say they could move much higher. The IEA attributes the market's fundamental strength last month to "strong demand from Asia and tight distillate markets", and to crude outages, particularly in Nigeria and the North Sea. In early May, attacks on Nigeria's oil infrastructure – ExxonMobil and Shell both declared force majeure on significant export volumes – drove the market higher, with futures breaking above $120/b.

Opec showed little enthusiasm for raising output, releasing a statement reiterating its position that "there is clearly no shortage of oil in the market". In the second half of May, following a visit by US President George Bush to Riyadh, Saudi Arabia said it would raise output by 300,000 b/d from this month, to 9.45m b/d. But the increase, modest in the context of overall oil production, failed to have the desired effect and prices pushed higher, to almost $130/b.

And there is scope for further rises, given inadequate supply growth, say banks. UBS has upped its forecasts: it expects Brent to average $113.50/b in 2008, $120/b next year and $116/b in 2010. Goldman Sachs, which has talked of a "super-spike" to $150-200/b over the next six months to two years, has raised its forecast for WTI futures in second-half 2008 to $141/b, up from $107/b.

But there are signs that the rally may weaken. US statistics show the country has made its first significant cut in oil-import dependency since 1977. In late May, Brent moved into contango and WTI threatened to follow, suggesting demand is weakening or supply is – at present – adequate. And any indication of a drop in Chinese demand following a devastating earthquake could also force prices lower, although, given damage to local infrastructure, the reverse seems more probable, with imports likely to rise. In addition, with continued support from speculative money, the downside looks limited.


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