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Oil to remain near record highs in 2006

By Rebecca Keenan

Wednesday 4th January 2006

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The record high oil prices of 2005 won't be repeated in 2006 but prices will stay high enough to keep oil companies in the black and motorists grumbling.

Oil prices soared to record highs in 2005, touching the $US70 ($NZ103) a barrel mark as the weather and political events erratically unfolded.

Hurricane Katrina devastated the Gulf of Mexico oil fields in August, causing supply concerns and underpinning the price rush.

Another cause for concern was tension in the Middle East - a key oil producing region - which also pushed prices higher.

Weather is unpredictable and to a certain degree, so are geopolitical tensions, but UBS energy analyst Gordon Ramsey says we can expect to see more of both in 2006.

"There are a whole range of issues out there that aren't going to go away which should help create a healthy premium on the oil price beyond the pure supply-demand fundamentals," Ramsey said.

"All of those come into play and the odds are pretty high that one or two of them will surface next year.

"There are expectations that there will be a relatively high number of hurricanes in the Gulf of Mexico again ... and political tensions still exist."

Earlier in 2006 the weather will play a bigger role as the largest market in the world - North America - is in the midst of winter, pushing up demand for heating oil.

Once the weather fines up in North America the price will be influenced by the normal market fundamentals of supply and demand.

China is also a large consumer of oil as it undergoes a modernisation process and Ramsey said the economic health of both China and the US would be key factors in the oil price over the next year.

"Hopefully those two countries continue to perform pretty strongly and we see relatively robust demand," he said.

Ramsey said the price of oil would stay around the $US60 a barrel mark in 2006.

CommSec commodities analyst David Thurtell said prices would most likely remain above $US50 a barrel in 2006.

"With world economic growth likely to remain firm, but spare capacity in oil production very low, prices are likely to remain above $US50 barrel over the next year or so," he said.

Macquarie Equities energy analyst Andrew Blakely was tipping a $US63 a barrel price for 2006.

"I am from the oil industry and remember when the price was $US10 (a barrel) in 1999 and everyone was saying its going to $US5 (a barrel) ... it was unbelievable to even comprehend a $US50 (a barrel) oil price," Blakely said.

A high oil price has encouraged growth in energy companies keen to take advantage of the opportunity to also grow profits.

"We see a lot of people scrambling to develop new assets given the high oil price environment," Blakely said.

But discovering and developing a new oil field takes time and demand looks set to outstrip supply for at least the near future. "Supply is somewhat strained at the moment and may not change dramatically next year and that in itself should lead to a higher oil price," Ramsey said.

Many oil companies have already taken advantage of the booming price reporting record profits in 2005.

Woodside Petroleum posted a record annual net profit in February, despite a slight production slip, and remains the first choice of many analysts.

Man Financial analyst Anthony Anderson said Woodside was one of the best resource plays in the world.

"I think Woodside is the stand out in that sector," he said.

"As long as oil stays up here the more attractive Woodside becomes."

Strong oil prices have also underpinned the high-performance of other Australian energy companies including Santos, Beach Petroleum and Origin Energy.

But while the coffers of oil companies may be bulging, many motorists have felt pain in their hip pockets with the rising oil price translating to higher petrol prices.

Service Station Association chief executive Ron Bowden said based on an oil price outlook ranging between $US50 and $US60 a barrel, motorists can expect prices at the pump varying between $A1.08 ($NZ1.18) and $A1.25 a litre. "People are very happy it is not around the $A1.30 (a litre) mark and I think it has eased a feeling of gloom, Bowden said.

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