World must brace for oil beyond $150

By Alastair Sharp - Analysis

LONDON (Reuters) - Oil's meteoric rise since the start of the year to nearly $150 has distressed consumers and policy makers the world over, but the stark reality is prices are likely to rise higher still.

For two decades, prices were relatively stable, but then they rose seven-fold from a trough below $20 in 2001. Since breaching the $100 mark on the first trading day of this year they have risen around 45 percent.

Given such momentum, politicians' efforts to bring the price down could well be a waste of energy.

"It rose so fast it's got a bubble feel, but bubbles can go on for very sustained periods, and underlying that is an extremely tight fundamental position," said Stephen Thornber, head of global energy research at Threadneedle Asset Management.

Global demand of some 86 million barrels per day is almost level with supply, and production growth is not keeping pace with soaring demand from emerging economies such as India and China.

Citing the strength of Asian demand, investment bank Morgan Stanley last month predicted oil would reach $150 a barrel by the Fourth of July holiday in the United States, usually one of the busiest U.S. travel days.

Their target proved just out of reach, with U.S. crude stopping short at a record of $145.85.

But the bulls have not gone away. Goldman Sachs, the biggest investment bank in the commodities sector, has tipped prices to hit $200 a barrel within two years.

Already prices are undoubtedly causing pain as protests at rising costs have broken out across the world.

Consumers, particularly in the world's biggest energy burner the United States, have begun to cut back on fuel use, but there is no ready substitute when it comes to transportation.

"You have to go to work, no matter what the price is," said Thornber. "Fundamental demand for transport and energy is difficult to turn off in the short term, but disposable income will be hit."

THREAT TO GROWTH

A sustained period of growth across the world was largely reliant on cheap energy and policy makers are fearful the unprecedented rally on the oil market will undo that.

"The longer it stays at this level or the higher it goes, the more pain it is going to cause in lots of different industries," said Colin Morton at Rensburg Fund Management.

Even oil companies say their gains have been muted.