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Oil Could Spike to $100 Before Year-End

Oil could spike to $100 before the end of the year boosted by tight demand and supply, a weak U.S. dollar and a market structure that is a fertile ground for speculators, an energy fund manager said on Tuesday.

Angelos Damaskos, chief of Sector Investment Managers, which runs two funds, including a hedge fund invested mainly in energy equities, said the oil market remained fundamentally undersupplied and that rather than pure speculation by hedge funds and financial speculators was driving oil prices higher.

Oil Pipeline in Germany
Oil Pipeline in Germany

"There is a genuine disconnect between supply and demand at the moment," he told Reuters in an interview on the sidelines of a commodities conference.

Damaskos said speculative buying by hedge funds had played its part in increasing market volatility, but they were not the main price drivers.

"There is a lot of speculation which affects the daily volatility. It affects the standard deviation around the mean... around the trend. The trend is definitely going up because it's underpinned by genuine demand of real people who consume real energy."

Oil has eased from its all-time highs of $83.90 a barrel, hit last month following the U.S. dollar's slide to record lows following a 50 basis point cut in interest rates by the Federal Reserve to inject calm into credit markets.

Analysts say while the weaker dollar was an important driver of oil in recent weeks, the shift in the oil forward curve in July to backwardation - where the near month contract is dearer than the following months - after remaining in contango for 28 months had drawn in funds and other financial speculators.

"That's why we could see a spike up to $100 very quickly. If the backwardation that we see today changes to contango, then immediately speculators will buy long dated oil and will push the spot price up," Damaskos said.

Booming China, India, Middle East

"I think there is a fair chance we will see oil at $100 before the year end. Maybe it won't be sustainable at $100. We may go to $100, go down to $75, and go back up to $90 I think over the next year or so we will see a range that gets closer and closer to $100," he said.

Oil's recent surge comes despite exporter group OPEC's deal to boost crude output by 500,000 barrels per day from Nov. 1 and fears of a recession in top oil consumer the United States, which could potentially be harmful for the world economy.

But Damaskos said fears of a U.S. demand slowdown were being ignored by a market which was expecting booming growth in China, India and the Middle East.

He said U.S. official data showed oil supply wasn't keeping pace with demand, citing U.S. Energy Information Administration data showing worldwide supplies including oil equivalents had peaked at 85.4 million bpd in July 2006. Demand on the other hand was projected to grow to 88 million bpd in 2008.

"The U.S. growth in demand is estimated at 220,000 bpd. Even if that drops to zero, it's going to be a small dent in the demand growth of 1 million bpd estimated from China, India and the Middle East next year," he said.

A U.S slowdown could at the margin even benefit China, a huge exporter of goods to the world's largest economy.

"Because China supplies cheap goods to the United States, they could be affected less than local manufacturers who supply high quality goods. When you see your income drop, you are more prone to buy cheaper goods," Damaskos said.

A tightening supply-demand picture for oil, difficulties in finding large new oil reserves, has resulted in investments in alternatives such as biofuels and ethanol in recent years.

But Damaskos dismissed biofuels as a viable alternative.

"Biofuels can only be marginal," he said, adding that they accounted for just 0.7% of global fuel needs and in order to do so, they occupied a land mass the size of France.

"In order to raise this 0.7% to 7% and make a meaningful contribution to fuel needs, you will need to occupy land mass the size of all the OECD countries including Australia," Damaskos said.