Oil to float over $50 for at least 3 years, forecasts Alliance Trust

Alliance Trust, the largest generalist investment trust company listed on the London Stock Exchange, today forecast that a combination of rising demand from new world powers and delayed investment in new supplies will keep oil prices well over $50 a barrel for at least the next three years. In addition, the gradually declining price of oil may well be checked by political instability in a number of key regions and OPEC’s continuing unwillingness to boost supply.

Global Oil & Natural Resources Analyst Angus McPhail said, “The strengthening price of oil has been a key market trend over the past decade. Although notoriously volatile, prices have risen to an average $63 a barrel in the first half of 2007, and with supply and demand now finely balanced, the oil price is set to stay relatively high. We forecast a $5 a year fall, with prices reaching the $50 mark in three years time, where we see them settling for some time after.”

McPhail points out that a string of price collapses through the 80s and 90s shook confidence in oil, leading companies to abandon investment in exploration and development in new fields and focus instead on increasing profitability: “The lack of investment back then means there is simply not enough new oil coming on-stream today, and it is likely to take between five and seven years for current exploration, development and production to translate into actual production and potential price falls.”

The current high oil price is also sustained by rising demand, particularly from China and India, while state-owned oil companies in countries like Iran, Venezuela and India, which control over 80% of current oil and gas reserves view these healthy revenues as a means to finance growth.

McPhail said, “While it is difficult to ascertain what China’s and India’s demand is adding to the current price, together they account for 12% of global consumption compared to 7-8% ten years ago. This sharply increased demand has taken away any slack in the market and, since OPEC believes the market is well supplied, this balance is likely to remain tight. The market will therefore remain nervous, marking oil prices higher at the slightest fear of restricted supply.”