Threadneedle: Outlook for oil following OPEC Conference

Steve Thornber, Threadneedle Global Equity Income Fund Manager and Head of the Global Oil sector research team, comments: "OPEC's compliance with their latest cut to quotas remains strong at 80% and oil prices have risen this year from a starting point of $39 to the current $60. OPEC members are likely to be reasonably happy with the modest pick up in prices and we do not expect them to change the current quotas. Relaxing quotas and raising volumes risks weakening the oil price, whilst further cuts could result in higher oil prices that might damage an already fragile global economy.

"The oil price has moved higher despite extremely weak demand conditions and inventories stand at 18 year highs - it feels as if the price rise of recent weeks has been less on fundamentals, which remain poor, and more on a pick up in risk appetite - a view that is supported by the movement in other hard commodities and the weakness in the dollar. There seems little impetus for significantly higher prices and near-term the oil price may have moved above the level supported by its fundamentals and should the appetite for risk decline, the oil price, along with other commodities could also weaken.

"For 2010 and beyond we see energy prices moving higher as the tight fundamentals of 2002 to 2007 reassert themselves. The trajectory of prices depends on the timing and speed of economic recovery, but once current high levels of inventories are consumed the industry will again struggle to meet even modest levels of demand growth from global economic expansion. Current cut-backs in industry capex will accelerate and exacerbate this process, potentially leading to a sharp squeeze in a few years time."