Normal crude price should be $75-$80

Analyst says oil prices are sky-high because of market speculations (AFP)

If global energy markets went by the natural dynamics of demand and supply instead of the speculative forces dominating it at present, the price of crude oil should range between $75 and $80 per barrel, said a senior energy analyst.

Wahb Ahmed, manager of Private Trading for the Middle East region at Danish investment bank Saxo Bank, said that even with the increasing demand for oil from China, India and the Middle East, the price should not be more than $100 per barrel in an ideal scenario.

"The current spike in oil prices has no relation with fundamental analyses of the energy markets, which should be based on the demand and supply basis," Ahmed said.

Despite Saxo Bank's prediction that oil prices may reach $150 to $175 per barrel during the second half of 2008, Ahmed stressed that speculative activities, geo-political factors, inflation and the depleting value of the dollar are behind this continuous increase in oil prices. "We noticed that a majority of investors suffered large losses in the United States and European equity markets last year and they shifted their investments to other areas, including the energy and gold markets," said Ahmed.

"This created pressure on the market and led to an unnatural increase in oil prices. With the current rate of speculation on oil prices, we will see $150 per barrel very soon and this will squeeze the world economy."

Ahmed also said the dollar would appreciate against all major currencies during the second half of the year.

"US equity markets have reached very low levels and stocks prices have become very attractive to investors who are increasing the demand for the dollar to purchase these stocks. Also, its is not expected that the US Federal Reserve will impose further cuts on its interest rate after it reached two per cent. Besides, the aftermath of the sub-prime crisis has started to shift from the US towards the Euro zone. There are high expectations that the European Central Bank and the Bank of England will start interest rate cuts later this year and this also will support the dollar against the Euro. We expect the Euro's value will drop to the range of $1.44 during the last quarter this year," Ahmed added.

"Also, the UK markets are expected to face difficult times during the second half of the year, after British banks started to write off multi-billion dollars of losses in the mortgage markets. The Sterling is projected to drop below $1.90 within the next few months," he said.

Speaking about gold prices, Ahmed said: "Historically, there is a strong correlation between the dollar's value and gold prices, as when the dollar appreciates, gold prices decline. We now see this relation is becoming weaker due to increasing global inflation. Investors now create strong positions in the gold markets as a hedge against predicted inflation. This situation will push gold prices higher during the next few months, despite the expected increase in the dollar's value."