Cheaper Oil Seen Fueling Economic Recovery

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Oil prices will probably weaken by another 20 percent to $15-$16 per barrel over the next six months, helping drive the world economy out of recession, one of the world's top fund managers said on Thursday.

Robert Parker, Deputy Chairman of Credit Suisse Asset Management, saw weak demand and swollen inventories depressing oil prices and inflation, despite best efforts by OPEC exporters to get prices back up with big supply cuts.

"A low oil price is in the interest of everyone except the oil producers," he told Reuters in an interview.

"I am sure the American and European governments like the idea of $15-$16 a barrel because that will underpin and reflate the G7 economies," added Parker, who oversees an investment portfolio of almost $300 billion.

From $30 per barrel in mid-September, Brent has dropped by more than a third to $19 as demand wavers and exporters, led by the OPEC cartel, have been slow to agree fresh supply curbs.

"Our overall thesis is that prices stabilize at $15-$16 and, as economic growth returns in the second half of next year, we will see the price go back toward $20," Parker said.

"But the I don't see $30 at least on a three year time horizon," he added.

The Organization of the Petroleum Exporting Countries, which controls two-thirds of world exports, said earlier this month that any further output cuts depend on substantial contributions from rival exporters including Russia, Mexico and Norway.

Mexico and Norway have agreed to OPEC's conditions and a global supply deal now hinges on Russia, which is weighing the commercial benefit of a cut against other possible advantages of keeping its distance from the Arab-dominated cartel.

"Any cuts by Russia will either be a sham or will be temporary," Parker said.

"One of the reasons for that is the state of the industry where there is very old infrastructure and their ability to turn the taps off is limited," he added.

Russian Insurance Against Saudi Risk

After last week's meeting between Russian President Vladimir Putin and his U.S. counterpart George Bush, Parker said there were also geopolitical reasons for expecting Russia to keep production up.

"There seems to be more than an element of American concern about political stability in Saudi Arabia that clearly has scope for a major shock to the oil market, and one way to insure against that is to make sure Russian production is maximized," he said.

OPEC has offered to wipe 1.5 million barrels per day off its output ceiling from January 1 if rivals contribute 500,000 bpd, but Parker foresaw a more modest reduction.

"Our theory is that if there is a moderate economic recovery in the first quarter of next year plus... production cuts by OPEC and non-OPEC of a million barrels per day, the price should hold at a floor of $15-$16," Parker said.

Parker said Credit Suisse Asset Management, a unit of the Credit Suisse Group, does not trade directly in oil futures, but that the commodity had a big effect on other markets in which it was active.

"Oil is a dollar commodity and there is a very good correlation between a strong oil price and a strong dollar and a weak oil price is correlated to a weak dollar," Parker said.

"The oil price also feeds very quickly into inflation... so a high oil price is going to cause damage to equity markets and bond markets," he added.

Global inflation will probably soften over the next six months, Parker said, partly because of a weak oil price outlook but also because of overcapacity in the service sector.

But he said commodities and inflation-linked bonds could become attractive again as an inflation hedge toward the end of 2002.