Expensive oil is here to stay

US oil futures have come within spitting distance of triple figures and the all-time inflation-adjusted peak of $101.70. And while prices have eased over the past few days, the medium- and long-term trend is up. The picture is one of "extreme fundamental tightness", as Barclays Capital puts it.

Oil inventories have been falling, even though a rebound is typical in the third quarter. US stocks are just 5.8 million barrels above the five-year average, compared to 40 million in July, while European inventories are also sliding sharply.

A seasonal uptick in demand in the fourth quarter will put further pressure on stocks and Opec's production increase won't be enough to push the market back into balance.

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So there is scope for "even higher highs". No wonder, then, that news of potential supply disruptions ranging from hurricanes in the Gulf of Mexico to political tension in the Persian Gulf has boosted oil of late.

America's Energy Information Administration said last week that Opec would need to more than double its planned production increase to balance the market in the first quarter of 2008; prices are likely to exceed $80 for the next several months.

Looking further ahead, the International Energy Agency estimates that Chinese and Indian demand is on track almost to treble, respectively, by 2030, when these countries will be importing more than Japan and America do today, while non-Opec supply is flagging.

Some worry that Opec oil reserves are inflated, while a big new oil field has not been found since the 1970s. With supply likely to be tight and demand strong far into the future, $100 may seem cheap before too long.