Signs That Oil Price Has Finally Peaked Experts Still Wary but Supply Response Brings Confidence

By IAN McCONNELL

HOPES are high that oil prices have peaked, at the end of a week in which North Sea Brent plummeted below $60.

Repeatedly in recent times, experts have suggested tentatively that the peak has been reached only to find the market was merely pausing before running up to an even higher level.

This is making experts wary of declaring categorically that the $70.85 high for US light crude – hit in the wake of Hurricane Katrina at the end of August – will turn out to be the peak.

However, there are signs that sentiment in the speculationfuelled oil market may at last have turned.

Julian Jessop, chief international economist at Capital Economics, said yesterday: “I would be wary of predicting the market has peaked because we have had a few false turns already . . . I am more confident than I have been for a while that oil prices have peaked.”

This confidence is based largely upon his belief that supply capacity is coming onstream fast to meet growing global demand because producers have adjusted their investment criteria to the high oil price environment.

Jessop said: “I think, ultimately, it is going to be the supply response that is going to be the key. We have been at a stage where oil prices have been substantially higher than people expected for some time.

A few years ago, experts were saying oil prices could fall as low as $5 a barrel . . . You can understand why that set the climate in the industry for a period of under-investment.

“It inevitably takes a while for the supply response to come through. There are plenty of industry insiders who tell us that a lot of investment is already underway and the supply response is not far off.”

Jessop believed the drive by companies to find alternatives to crude oil also supported the theory that prices may have peaked.

Highlighting news this week that Procter& Gamble is looking to palm oil and coconut plantations for raw materials for the production of its Tide laundry detergent and Head and Shoulders shampoo, Jessop said: “I think that is a pretty good signal that crude prices have indeed peaked.”

Jessop is predicting that oil will trade at between $40 and $50 a barrel next year.

Andrew McLaughlin, chief economist of Royal Bank of Scotland, was slightly more cautious in his forecasts but foresaw an easing of demand growth. He said: “The capacity is so tight. If there was any other supply-side shock, be it a strike or a storm or anything, it could push the price higher.

However, he added: “The one thing we can say is the global growth cycle peaked in the middle of 2004. It is clearly decelerating from there. As that starts to feed through, there will be some easing off on the demand side.”

Benchmark US light crude was higher than $66 at the end of last week. It ended a week of heavy losses by ticking up 44 cents to $61.80 yesterday.

North Sea Brent, which fell through the $60 mark on Thursday, edged up 81 cents to $59.17 a barrel yesterday.

One trader said yesterday:

“Sentiment has changed. Every rally at the moment is there to be sold into.”

The US government’s readiness to use emergency oil reserves this winter has been a key factor in dragging oil prices down this week.

This fall has occurred even though 10 US refineries are still shut after hurricanes, Gulf of Mexico gas output is down sharply, and workers at Total’s Gonfreville refinery in northern France are continuing to strike.

However, the easing of prices has been aided by figures showing US gasoline demand over the past four weeks has been down 2.6per cent on a year earlier.