Published On: Sun, May 24th, 2009

Oil prices rise, but unlikely to spike again

Crude oil prices are likely to continue rising, but there will be no major spike in the market in the coming months as world oil consumption still remains weak, analysts said.

Global crude prices, which plummeted from 147.27 U.S. dollars per barrel to below 40 dollars last year, have witnessed a moderate yet steady rebound over the past months, reaching 61.5 dollars on Thursday at the New York oil market, marking a three-month high.

The reason for the recent rally is that the U.S. government reported a surprise decline in crude and gasoline inventories as the driving season approaches, Wall Street Strategies’ senior research analyst, Conley Turner, said.

“The rally in oil is also supported by the fact that there is a sense of growing optimism among market participants that the economy is not getting worse and is in fact, turning a corner,” Turner said.

However, analysts also warned that the current oil price levels were not in line with the underlying weak global economic conditions. They said that runaway crude oil prices were therefore unlikely to be seen in the coming months.

“If you have a look at the fundamentals in the market at the moment, the inventories in the U.S. are still at 19-year highs and there’s no real indication that demand has re-entered the market yet,” Ben Westmore, an energy analyst at the National Australia Bank, said.

The International Energy Agency (IEA) said on Friday that global oil demand would hit a 28-year low this year because optimism about an economic recovery was not reviving the appetite for energy.

The rebound in oil prices is largely connected with the performances of the financial markets, instead of the balance of supply and demand, the Paris-based organization said, adding that the world’s oil demand has shown no signs of recovery with the absence of fundamentals to back the oil market.

Xie Guozhong, an independent economist in China, also believes that the recent price rebound cannot be explained by analyzing the balance of supply and demand, as financial markets play a major role in pushing up prices.

The large scale stimulus packages launched by some developed economies boosted capital flow into the international oil market raising prices, Xie, a former Morgan Stanley chief economist for the Asia-Pacific region, said.

Judging by the current global economic situation, analysts said oil prices may occasionally rise above 63 U.S. dollars per barrel, but it was unlikely to see any major price hikes this year. They said for the most part oil prices would fluctuate between 50 and 60 dollars.

According to a short-term outlook released last week by the Energy Information Administration of the U.S. Energy Department, prices are expected to average about 55 dollars per barrel for the rest of 2009, and 58 dollars per barrel in 2010.