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FUND VIEW-Oil may fall below $110, but rebound inevitable

Mon Aug 4, 2008 8:10pm IST
 
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LONDON, Aug 4 (Reuters) - Oil is undergoing a "rational price correction" and could fall below $110 a barrel in the near term, but a rebound to new highs is inevitable, fund managers at Investec Asset Management's energy fund said on Monday.

Oil has fallen by more than $20 from its all-time peak of $147.27 a barrel on July 11, and was trading at about $125 CLc1 on Monday.

"We believe that the crude price could test levels closer to $110 or below in the near term," Jonathan Waghorn and Mark Lacey, co-portfolio managers at London-based Investec's Global Energy Fund said in a report.

"This level equates to the marginal cost of extraction for crude and will represent a long term floor for the crude price," they added.

Oil has shot up from below $50 at the start of 2007 as part of a six-year rally fuelled by soaring energy demand in developing economies led by China, a weak U.S. dollar, supply disruptions and political tensions in key oil producing regions and a surge of cash into commodities from investment funds.

The price jump has dampened demand around the world at a time of faltering global economy.

Waghorn and Lacey, both formerly Goldman Sachs analysts, said demand destruction was clearly happening in OECD economies and there was increasing evidence that non-OECD economies were also cuttting back, but added that long-term fundamentals for global energy demand remained robust.

The industrialisation and urbanisation of the non-OECD, together with the replacement of infrastructure in OECD countries would continue to support steady long-term global energy demand growth, they said.

"Over the medium term we do not foresee any significant source of energy that will compete with, or substitute, oil in the global economy," the report said, adding that the market's preoccupation with demand destruction had turned attention away from downward risks to future global oil supplies.  Continued...

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