Oil price optimism proving premature

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The world's leading economies were in high spirits on Monday in the belief that they had put the global recovery back on track but - as the markets showed on Monday night - such optimism is already proving premature.

Saudi Arabia's move to break from the ranks of the Organisation of Petroleum Exporting Countries and unilaterally increase crude production was cheered in the art deco corridors of the Waldorf Astoria hotel in New York. Finance ministers from the Group of Eight industrialised nations hailed it as "a step in the right direction" and are now leaning on other members of the cartel to follow suit.

But with both the capacity - and willingness - of oil producers to increase production in doubt, the mood of self-congratulation could be misplaced.

The West Texas Intermediate futures contract was almost $2 higher on Monday than on Friday, before the G8's call for more supply. "The market's view is that not enough has emerged to make a difference," said Kevin Norrish, oil analyst at Barclays capital.

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But even if it can raise production to these levels, Mr Norrish says it is not a foregone conclusion that the kingdom will do so. So far, the signs are that Saudi Arabia believes that oil prices have been driven up by a combination of financial speculation, lack of refinery capacity in the US and fears of a oil sabotage in the Middle East rather than because of lack of crude oil.

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