Oil prices poised to take off, warn analysts

The oil glut that has kept crude prices under $20 a barrel for most of the last decade is over, according to a growing number of industry analysts.

Although the consensus view still holds that oil will average $18 a barrel this year, those who believe in a sustained rise to $20 or more are gaining credence. Bears, meanwhile, are still reeling from having their 1996 predictions of $15 to $16 a barrel proven so badly wrong - the price of Brent crude averaged $24 for the year.

Some analysts are now worried that an oil shock, like the 1973 crisis orchestrated by the Organisation of Petroleum Exporting Countries (Opec), could occur if there is political instability in Saudi Arabia or a serious disruption in another significant producing country.

The bulls argue that both sides of the supply and demand equation are being squeezed, at a time when excess capacity (at less than 10 per cent, including the blockaded Iraqi production) and stocks (at 57 days consumption, down from 70 days) are at record lows.

"Demand has been grossly underestimated," said Tony Alves, oil analyst at Henderson Crosthwaite. "I just don't think rising production is going to support that demand."

Fergus MacLeod, the head of oil research at NatWest, owner of oil analysts Wood MacKenzie, added: "The major factor is overestimation of supplies from outside Opec."

Global production has increased from 42.4 million barrels per day to 43.5 million b/d since 1990, with all of the extra production covered by 2.5 million b/d of increased output from the North Sea.

But the growth in British and Norwegian oil production has been due to better technology - such as three-dimensional seismic surveys and horizontal drilling - which can help to wring more from ageing fields.

Mr MacLeod said that although North Sea production will continue to expand, it will do so at a much slower rate. "Other people are assuming the prolongation of the lives of these fields is going to continue indefinitely. There's a mounting body of evidence that that's not going to happen."

Production in the CIS is also unlikely to grow, as Russia has yet to implement a legal structure with which foreign companies feel comfortable.