Oil prices likely to be driven by fundamentals not speculation

Oil markets are expected to remain tight through 2008, with oil prices averaging about $95 a barrel, the IMF said. While non-Opec supply should increase slightly, Opec seems unlikely to raise production given the prospects of lower growth in advanced economies, it said.

Global demand is expected to continue to rise at a moderate pace.

"The near-term balance of risk to oil prices is on the upside, as prices remain sensitive to tight supply and geopolitical uncertainty.

"In this regard, Saudi Arabia's continued constructive role will be vital for global oil market stability."

The Kingdom's planned investments are $80 billion (Dh293bn) over the medium term, with a view to expanding production capacity in the oil sector by 37 per cent to 12.5mbd and refining capacity by 43 per cent to about 6mbd.

A further $170bn in oil investment is planned by the other GCC countries.

Oil prices have continued to break records in 2008 even though pundits say the US economy is sliding into recession. At these levels, oil prices are likely to be driven by fundamentals rather than speculation, experts have said. The IMF disagrees.

"It would take a global recession to bring about a major decline in oil prices. Currently, the IMF is projecting a decline in world growth to 3.7 per cent, which means that oil prices should not be expected to fall sharply if they are being driven solely by economic growth, or fundamentals. Even if the world does go into a recession, history suggests that the effect on oil prices could be lagged, depending on how much discipline Opec is able to exert," the report said.

"It is hard to explain current oil prices in terms of fundamentals alone. The recent surge in the oil price seems to go well beyond what would be indicated by the growth of the world economy. Producers and many analysts say it is speculative activity that is pushing up oil prices now."

Producers argue that fundamentals would yield an oil price of about $80 a barrel, with the rest being the result of speculative activity.

"It is difficult to get a direct measure of speculative activity," the IMF said. "It is true that open positions in oil futures more than doubled in size over 2003–07.

Net long noncommercial positions at the New York Mercantile Exchange briefly reached new highs in mid-2007, after which they declined. Yet prices have stayed high even as these speculative positions were unwound.

"Moreover, there is evidence that changes in net long non-commercial positions generally follow price changes rather than lead them. So this line of reasoning would imply that speculation is not the cause of recent increases in oil prices," the IMF said.