London's Center for Global Energy Studies Warns that Oil Recovery Bears Risks

LONDON, Oct. 19 (UPI) — Consumers and producers of oil need to handle the current economic recovery with care to make sure they don’t misread signals and trigger a change in the oil market that may jolt the world out of the recuperative mode, London’s Center for Global Energy Studies warned Monday.

The world economy is coming out of recession, largely due to unprecedented cash injections by governments, but growth remains fragile and patchy, the CGES said in its Monthly Oil Report for October.

The report, which specializes in market analysis and forecasts, said crude oil prices were being driven by “wider economic forces and remain vulnerable to the misreading of economic signals.”

If the unforeseen happens, CGES said, “oil producers may need to act as promptly and decisively when required as they did when the global economy collapsed last year.”

The center studies producers both inside and outside the Organization of Petroleum Exporting Countries but puts special focus on OPEC production and pricing policies and their impact on global energy markets. CGES was founded in 1990 by Sheik Ahmed Zaki Yamani, Saudi minister for petroleum and mineral resources from 1962 to 1986.

CGES indicated that much now depends on the Federal Reserve’s Beige Book assessment of the U.S. economy, to be published Wednesday. The Fed report, published eight times a year, brings together vital anecdotal information from bank and branch directors and interviews with key business contacts, economists and market experts.

The Beige Book is seen as crucial to evaluating the current state of play in the U.S. and world economies.

CGES said the Northern Hemisphere winter temperatures and weather forecasts would also affect oil demand, supply and prices in the coming months.

The center said OPEC faces a dilemma because the prices currently appear balanced between the upward pressures from the signs of economic recovery and the downward pressures from huge oil inventories in the consumer countries.

OPEC and non-OPEC producers, both the countries and publicly traded oil companies, support oil prices staying around $70-80 a barrel to ensure oil-led economies and investments in “non-conventional” oil remain in good shape.

However, CGES warns, the “delicate balance” is bound to be upset, and no one can predict how and when.

The center’s analysts also point to the risk of staking too much on recovery fed on stimulus packages. Asian recovery, for example, could falter “unless global trade begins to pick up, which would require consumers in North America and Europe to resume their purchases of Asian-made goods.”

A failure of that recovery process, CGES said, could lead to “double-dip recession” and a collapse in oil prices resulting from oversupply amid low demand.

“However, if the global economy recovers as the World Bank seems to think it will and, crucially, if international trade recovers with it, then OPEC will need to act promptly and decisively to raise its production once again in order to prevent a damaging repeat of last year’s surge in oil prices towards $150 a barrel,” CGES said.

“Whatever happens, OPEC’s action will need to be timely, forceful and transparent.”

How the return to economic growth is managed may prove crucial. While some analysts believe the current recovery is due almost entirely to the massive government stimulus packages around the world that need to continue, other experts see the packages creating bubbles that need to be checked.

“Governments will need to decide on a clear course of action; the one thing that they cannot do is to wind down their stimulus programs by stealth,” CGES said.

Copyright 2009 by United Press International

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