Oil prices only 'a brief respite'

THE oil price's current slide is little more than a temporary reprieve for jittery investors worried about the impact of spiralling fuel costs on the global economy.

Analysts and dealers say tight supply, strong demand and terrorism fears could push crude to new highs in coming months.

Supply bottlenecks at American refineries - operating close to full capacity - are set to keep the price of oil products such as petrol sky-high.

The past week has seen a turnaround in oil's fortunes.

After striking a record high $42.45 a barrel, US crude futures have slipped to $38 in the wake of Opec's decision to lift production quotas. In London, Brent has fallen from more than $39 a barrel to less than $36. But experts have dismissed the drift lower as little more than a temporary, technically driven move.

'There's certainly lots more upside for the oil price,' said Orin Middleton, energy trader at Barclays Capital. 'The key issues that have gripped the market recently haven't gone away.

'Opec has tried to calm the market's nerves by increasing production, but demand is still incredibly strong, particularly from the US and China. There aren't too many reasons to go short at the moment.'

Fears of a supply crunch have prompted Barclays Capital to lift its fourth-quarter forecasts to $40.40 for US crude and $37.10 for Brent. By 2010, it sees US crude at $43 and Brent at $40.80.

'The further down the line you look, the more difficult it is to see how enough production capacity can be brought on in time,' it says in a new report.

On the flip side of supply worries is rampant global demand. The International Energy Agency last week said the increase in demand this year looks set to be the steepest since 1980 as the US and China continue to guzzle crude.

Raising its forecasts for the second time in as many months, it said demand will rise by 2.3m barrels a day to 81.1m. The Opec producers' cartel has lifted its daily quota to 25.5m barrels.

Add in geopolitical tensions in the oil-rich Middle East - especially worries about further attacks in Opec kingpin Saudi Arabia - and you have a potent cocktail that suggest a fresh surge in prices.

Economists warn persistently high oil prices will hamper the global economic upswing, although the British economy should be reasonably immune because of its reduced reliance on oil in recent years. Rough estimates suggest nations lose 0.5% of gross domestic product for every $10 rise in the cost of oil.

Opec President Purnomo Yusgiantoro urged producers who are not members of the cartel to increase production to help reduce prices.

'We are asking non-Opec countries to raise their supply,' said Yusgiantoro. He insisted Opec will keep its promise to increase output by 2.5m barrels a day by 1 August.

'This will not change.'

Non-Opec producers account for about 60% of global production.