Journey out of recession may put up cost of driving

Investment fund Hermes Commodities said the rebound would be driven by rising demand for fuels used in shipping and road freight.

A rise in the price of crude could be expected to have a knock-on effect for both haulage companies and motorists filling up at the pumps. The increase would put oil prices at more than double the low of $40 per barrel which was reached in the winter of 2008, when prices fell on the back of lower demand for transport fuel during the recession.

But the cost of oil has rebounded strongly since then, with prices reaching $84.01a barrel on Thursday, the highest level since October last year.

The increase has been driven by a combination of investors turning to the commodity as an alternative to the dollar, as well as moves by the oil cartel the Organisation of petroleum exporting Countries to limit supply.

However, Hermes Commodities believes the price still does not reflect the fact Western economies have emerged from recession.

David Hemming, portfolio manager for Hermes, said oil prices were likely to drop in the short term because there was still an oversupply.

But he added that the global economic recovery and strong demand from China would begin to reverse the situation.

The potential for political conflict in Iran and Iraq had also been factored into the forecast.

He said: "As Iran's rhetoric becomes more inflammatory the US could be forced to appear to take action. If action is taken, then it will put an upward pressure on oil prices, as an invasion could constrict Iranian supply."

Even if oil were to reach $90 a barrel, the price would still be well down on the record high of $147 which it hit in July 2008.

However, analysts from Commerzbank disagreed with the Hermes prediction, and instead expected the price of oil to fall to $65 a barrel by the middle of this year, before recovering to around $70 US a barrel by the end of it, according to reports published yesterday. One London daily newspaper commented: "Since the beginning of March, oil prices are holding steady above $80 per barrel, while fundamental data are basically unchanged. The rise in demand for oil is still coming almost exclusively from emerging countries, especially China.

"As oil supply is rising at the same time, the market is unlikely to tighten."