Low oil prices might favour economic recovery: analysts

26th May 2010, Comments 0 comments

Falling oil prices, down nearly 20 percent so far this month, might be just one of the few bits of good news among all the gloom for the global economic recovery, analysts said.

At a time when a non-stop barrage of bad news on Europe, debt and growth has roiled financial markets, importing countries can at least be happy that their oil bills are not rising, at least in the short term.

Oil prices, which hit nearly 90 dollars at the end of April, have since fallen 18 dollars, undercut by fears the European debt crisis will torpedo global economic growth and so demand.

At the same time, the crisis has driven the dollar higher, making oil more expensive for those buying it with weaker currencies which hits demand.

The global economic recovery would benefit from a period of lower oil prices given the growing risk of it falling fall back into recession, the Centre for Global Energy Studies said on Monday.

OPEC favours oil at around 80 dollars but the "global economic recovery, and with it the long-term health of the oil market, would both benefit from a period of more moderate price aspirations," London-based CGES said in its latest monthly report.

Oil producers may not be so happy but they should feel no real reason to panic -- price are still close to the 70-80 dollars favoured by OPEC as fair to both sides and high enough to justify investment.

Even after the latest price fall to around 68 dollars, oil is still trading way above the 32 dollars per barrel seen in late 2008 after the collapse of US investment bank giant Lehmans sparked the global credit crunch.

The Organisation of Petroleum Exporting Countries is "not yet" concerned by the decline below 70 dollars, Kuwaiti Oil Minister Sheikh Ahmad Abdullah al-Sabah said on Tuesday.

The Kuwaiti minister, whose country is OPEC's fifth-largest producer, said the cartel has no plans to hold an emergency meeting to discuss prices.

"We only ask for more compliance" with production quotas, said Sheikh Ahmad, adding that he was hopeful prices would stabilise at between 75 and 85 dollars.

Calyon's Christopher Barret said prices around 70 dollars "are close to perfection. While not as beautiful' as a good 80 dollars could be, they remain largely acceptable to OPEC and are likely not to cause too much harm to the fragile economic recovery."

Analysts said recent developments in the market also reflected how influential financial investment groups had become, with oil now driven as much by their activities as by underlying supply and demand.

Hedge funds -- in the spotlight for their role in the global financial system and the 2008 crisis -- appear to have played a crucial role, driving prices higher in April then taking profits in May, analysts said.

"It will come as no surprise that according to notes from UBS last week, hedge funds have turned into massive sellers, reaching the highest level since January 2009," said David Hufton of PVM.

"The biggest buying spree suddenly became one of the biggest selling sprees ... a May survey of fund managers shows a large fall in attitude to risk with Europe seen as hopeless and China's star waning," he said.

Fast expanding China has been a major driver for oil in recent years, importing ever more energy to drive its booming economy, but Beijing has been tightening up this year to prevent overheating.

"A slowdown in the rate of Chinese economic growth would remove at a stroke the single largest support of oil demand," CGES noted in its report.

For other analysts, the fall in price is healthy.

"On a fundamental basis we do believe that oil is now much closer to ... fair-value," said Olivier Jakob of Petromatrix.

© 2010 AFP

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