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Fundamentals driving oil price higher

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02/07/2008

Alliance Trust claims fundamentals rather than speculation are driving oil prices higher.

Angus McPhail, global oil and natural resources analyst at Alliance Trust, said: “Fundamentals rather than speculation are driving oil prices higher. Oil markets remain tightly controlled by supply and demand. China is increasingly leading demand from non-Organisation for Economic Co-operation and Development members (OECD), which is currently more than offsetting weakening demand from the US and other OECD countries.

“On the supply side, production from non-Organisation of the Petroleum Exporting Countries (OPEC) is going through a period of sustained weakness with Russia being one of the largest casualties, which is now registering significant production declines.

“Overall, OPEC production has risen with some additional production being brought on by the Saudis. However, most of these barrels are of heavier crude quality and have lower values attached to them and are therefore less likely to make a meaningful impact on the current oil prices.

“Crude oil stocks remain low on a global level, particularly in the US, where they stand at well below the five-year average. We believe it is very likely that we will have to face even higher oil prices than the ones we are currently seeing.

“Rising geopolitical risk, hurricane risk, and rising industry cost inflation are all factors which could push prices to new highs over the next three months. Commodities excluding oil have risen considerably in the past year and although some speculative money has moved into precious metals we do not think that the evidence points towards a significant speculative bubble emerging in oil prices.”

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