Oil could reach $200 before demand gets hit

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Oil stocks should catch up

By Santosh Menon
The price of oil could rise to $200 a barrel in the next two years before it starts to seriously hit demand, fund manager Tim Guinness said.
"I am increasingly comfortable with the analysis which says the oil price is going to have to go to $200 before demand is dampened enough," Guinness, who is the chief investment officer of Guinness Atkinson Funds, told Reuters in an interview.
Guinness, a highly-rated fund manager who was the chairman of Investec Asset Management for four years before retiring in 2002, said he expected the spike to $200 to happen in 2010 and predicted the average price that year at around $160 a barrel.
Investment bank Goldman Sachs issued a similar prediction last week, saying oil could shoot up to $200 within the next two years as part of a "super spike" driven by poor growth in oil supplies.
Oil has relentlessly surged to new peaks and hit an all-time high of $126.40 on Monday, despite increasing evidence of demand destruction emerging in industrialised economies.
The International Energy Agency, the adviser to 27 industrialised countries, said world oil demand will rise less than expected in 2008. It said global oil consumption will rise by 1.03 million barrels per day (bpd), 230,000 bpd less than the previous forecast.
But Guinness, a 60-year-old who cycles to work on his folding bike, said the drop in demand in industrialised countries was more than compensated by booming demand in emerging economies, notably China, India and the Middle East.
"What is going on is that OECD demand destruction is somewhere between 200,000 to 500,000 barrels per day (bpd) at the moment, while demand growth in the developing world is still over one million bpd," he said.
"The developing world demand growth is overwhelming the developed world demand destruction," added Guinness, who manages some $680 million in 9 funds globally.
Guinness, a descendant of the Guinness family behind the Irish beer, said the reason behind the rise in prices was fundamental and stemmed essentially from poor growth in oil supplies.
"We think that the supply situation in 2009 and 2010 is looking increasingly bleak," he said, adding that poor growth in non-OPEC supplies was mainly to blame.
Peace in Iraq, which could potentially bring up to 6 million bpd of additional capacity into the market, was the only hope to bring prices down, Guinness said.
For 2008, Guinness Atkinson Funds has raised its average price forecast to around $95-$100 a barrel, up from around $85 previously.
Guinness, who mainly invests in energy equities, said share prices of companies in the energy sector had not kept pace with the rise in the commodity price, offering big upside potential.
He said energy equities were up 17 percent since July last year, while oil prices were up 100 percent during the period.
"The value gap between oil equities and the commodity is getting bigger and bigger. Philosophically we are long energy equities and short commodity," he said.