Not so sizzling forecast for summer oil prices

What's down Investors banking on the usual summer surge in oil prices, be warned: crude's rally may have run out of gas.

Investors banking on the usual summer surge in oil prices, be warned: crude's rally may have run out of gas. Analysts caution that current oil prices above US$80 a barrel are not justified by the supply and demand fundamentals and that any sign of a pause in an economic recovery could lead to a correction in oil prices. That would be a reversal of the recent trend. For each of the past six years, oil has climbed in the lead-up to summer. Oil for delivery in July and August, the peak of the summer driving season in the northern hemisphere, is priced above $82.60 per barrel for US sweet crude, and above $81 for London Brent.

Few expect prices to rise much above that, once summer sets in. In its monthly outlook released yesterday, OPEC was cautious about short-term prices, noting that the group's supply of crude to the market would remain higher than the expected consumption rate. "Questions remain as to how long governments will be able to afford supporting their economies with stimulus measures, OPEC said. "Should this support diminish, then world oil demand would of course be impacted." Current oil prices have been supported by little more than the futures market itself, OPEC said, "with money managers expanding net long positions". A number of analysts and government officials agree with OPEC's position.

Mohammed al Hamli, the UAE Minister of Energy, said last week that oil prices were being supported by expectations for growth in demand several years from now, and not by current conditions. One factor could be the US dollar. Oil has maintained a negative correlation with the value of the dollar in recent years, a relationship explained by the fact that oil is generally priced in dollars. When the value of the dollar rises, oil becomes more expensive for buyers outside of the US and consumption tends to fall. When the dollar falls, commodities investors outside the US tend to bid up the price of oil.

The dollar's rise against the euro in recent weeks has weighed on oil prices, said Jorge Montepeque, the global editorial director of market reports at Platts, a US-based oil pricing service. [e-mail]