Oil price to stay above $100 in the long-term

AMP Capital InvestorsÆ Shane Oliver expects temporary relief mid-year, when oil prices fall to $85 per barrel before climbing again.
Just as 2007 ended, 2008 has started off on a rough note with the oil price surging to a record $100 a barrel and a run of weak US economic data adding to recession fears in the US all combining to push share markets lower, notes Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.

The latest spike in the oil price reflects worries about oil production in Nigeria at a time when demand for oil from emerging countries remains strong and stockpiles in the US are low.

However, the Sydney-based Oliver believes that while the long-term trend in the oil price will remain up - well above $100 in the years ahead as supply struggles to keep up with long-term demand from developing countries - the short term slowdown in global growth now underway will lead to a fall in the oil price into mid-year to around $85 a barrel providing some
temporary relief.

Higher oil prices will add to inflation globally in the short term, but with global growth slowing down and the US teetering on the brink of recession, inflation will ultimately fall this year, he says.

Increased fuel costs will add to the pressure on US households to cut back their spending, which will only intensify the downside risks to the US economy and the need for retailers to discount their goods if they want to maintain sales. The latest spike in the oil price does make life tougher for central banks though - particularly the US Federal Reserve. The Fed should be cutting interest rates aggressively, but short term inflation worries largely on the back of the oil price surge are slowing it down, Oliver says.

The key global themes for 2008 are likely to be the downturn in global growth, but with an improving outlook through the second half of the year, a fall in inflation as growth slows, falling global interest rates and soggy industrial commodity prices early in the year giving way to renewed strength in the second half, Oliver says. Uncertainty about the global growth outlook is likely to result in a continued rough and volatile ride for investors during the first half of the year. However, he notes an improving trend should become apparent during the second half as global growth prospects improve on the back of central bank efforts to reflate their economies.

After a rough first half of the year, global shares should provide reasonable, but unspectacular, returns of around 9% in 2008 as a whole, Oliver says. ôFor long-term investors its best to just ride it through. We don't see the recent and continuing volatility as the start of a new major bear market,ö Oliver says. ôThe Fed is far more proactive than most other central banks and betting against the US consumer continuing to consume for an extended length of time is a dangerous bet.ö
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