Oil's rally above $80 may be short-lived

LONDON (Reuters) - Oil is unlikely to rise much above $80 a barrel over the next 18 months, because recent rallies have been driven by broad financial market sentiment, not by oil fundamentals, the manager of a London-based oil fund said.

Angelos Damaskos, manager of Junior Oils Trust, a 35 million pound ($55.9 million) fund investing in small oil companies, said oil's rally in recent days was driven by optimism over global economic recovery, which could easily be reversed. U.S. crude oil jumped to a three-month high above $82 on Tuesday, supported by a rally in global equities and a falling U.S. dollar .DXY. A weaker greenback boosts the purchasing power for oil by developing nations where demand is surging.

“This is probably short-term ... The current moves up and down are related to the sentiment of investors in the market about the future prospects for the global economy and not really the underlying demand for physical oil,” Damaskos said on Wednesday.

“There could easily be an event or economic indicator around the corner that could be significantly negative and turn the sentiment of investors, and they will sell the market again.”

Strong earnings from top banks supported a rally across financial and commodity markets over the past week, even as data from the U.S. and China, the world’s top two energy consumers, pointed to a slowdown in economic growth.


Before this week, oil had not been above $80 since May, when prices reached heights not seen since 2008, the year oil climbed to an all-time peak of $147.27 before collapsing to below $33.

Damaskos said his fund, part of the Sector Investment Managers group, was not betting on another spike in oil prices in the short term, because global energy demand was still too fragile.

“2010 and 2011 are going to be years of subdued economic growth, and demand from the developed economies will continue to be weak. Our view therefore is that oil will trade in a range between $65-$85 for the next year and a half,” said the fund manager, who is also chief executive of the group.

Beyond the next two years, Damaskos said, a simultaneous rise in global energy demand and tightening of crude supplies will send oil prices above current levels for the long term.

Delays to offshore oil projects following April's disastrous explosion on a BP-owned BP.L oil rig in the Gulf of Mexico will be one of the factors behind that supply tightening, he said.

The accident, which killed 11 workers, led to an oil leak that BP is still struggling to plug and prompted companies to put a number of deep offshore oil projects on hold. Increased regulation on future plans are also likely to drive up costs.

“There is already a significant impact on projects in the last three months, and this will continue,” said Damaskos.

“Next year we may start to feel the impact of these project delays on supply, especially when the world economy returns to growth. It will be a significant factor for prices.”

Junior Oils Trust has returned 9.6 percent since the beginning of 2010. One of the fund's top performers this year was British oil and gas explorer Dana Petroleum DNX.L.

Editing by Jane Baird