Oil prices to subside: Economists

The Jakarta Post, Jakarta

Defying mainstream perceptions that high oil prices are in for the long run, economists at two foreign banks are predicting that oil prices will subside toward the end of the year and in 2006.

Top economists from the Deutsche Bank and ANZ Bank said on Tuesday that oil prices would soon recede to a level much lower than US$60 a barrel.

Deutsche Bank chief economist Norbert Walter said at a media briefing that he disagreed with those who claim oil prices could only go one way, even to as high as $100, and said they were exaggerating.

"My optimism is based on the fact that we are closing in to the peak of oil prices in the cycle."

Walter projected that oil prices would reach an average of $54 a barrel in 2006, while for the rest of the year, it would hover at $57.

On Tuesday, light, sweet crude for October on the New York Mercantile Exchange was down 2 U.S. cents at $65.63 a barrel by afternoon. On London's International Petroleum Exchange, October Brent crude was up 17 U.S. cents at $64.67 a barrel.

His prediction was based on an expected slow down in the U.S. economy, as regular increases in key interest rates by the Federal Reserve would slightly apply the brakes on U.S. business expansion. It would eventually reduce demand for oil, Walter said.

According to a ANZ Bank study, throughout 2004, oil demand from China and the U.S. accounted for 36 percent and 20 percent of the world's total demand respectively.

Walter estimated that the Fed would continue raising interest rates to 4.5 percent by early next year, from the current 3.5 percent.

Worldwide demand would also likely slightly decrease, in line with an expected decrease in gross domestic product (GDP) worldwide to 4.5 percent at the end of the year and 4.1 percent at the end of 2006, from 5.1 percent recorded the end of last year.

Amy Auster of ANZ Bank echoed Walter's argument, saying that oil prices would not go beyond $70, citing also the rise in U.S. interest rates, which she said would stand at 4.25 percent at the end of year and 4.5 percent in January next year.

She projected that global oil prices would range between $55 and $60 per barrel for the rest of 2005 and $50 to $60 in 2006. (006)