Get used to high oil prices, they are here to stay

Oil prices may have fallen about 10 per cent from their high near $US50 a barrel in mid-August, but that's not deterring fund managers, many of whom say the long bull run has a lot of life left in it.

High oil prices are a result of tight supply and demand fundamentals rather than geopolitical risk and speculation, and should be regarded as a long-term phenomenon rather than an aberration, say many fund managers who invest in oil shares.

Soaring oil prices this year have recently led analysts to increase their forecasts for 2005 and 2006, from the mid-$US20s per barrel to the low to mid-$US30s. But many fund managers expect even higher prices.

Five of six managers interviewed said they expected oil on the New York Mercantile Exchange to trade between $US34 a barrel and $US40 a barrel long term - well above last year's average price and significantly higher than most analysts' forecasts for next year.

"Current supply-and-demand fundamentals make a compelling case for the oil price to be high for a long time," said Poppy Buxton, London-based manager of the Merrill Lynch International Investment Fund World Energy Fund, which invests in oil and gas companies around the world.

In this high-price environment, she recommends investing in smaller companies that explore for and produce oil, as they are more leveraged to the oil price than integrated oil companies, whose refineries incur higher costs.

This year, up to the end of August, the MLIIF World Energy Fund has risen 33.6 per cent, versus a 29.7 percent rise in the Morgan Stanley Capital International World Energy Index, and a 15.6 per cent rise in world markets measured by the MSCI World Index.

Not all managers think the oil price gains can hold up.

"There's too much speculation," said Henry Cavanna of Cavanna Capital Management in Stamford, Connecticut. "I don't see any supply disruption."