Record oil fixes attention on long-term supply

By Barbara Lewis - Analysis

LONDON (Reuters) - Traders in oil and other booming commodities markets, whose prime focus was once short-term supply and demand, have shifted attention to fundamentals over a much longer timescale.

The change has been signalled by record-high oil prices for contracts stretching out to 2016, as well as for prompt delivery, as institutional investors and end-users alike take the longer view.

"The futures market was designed as a short-term hedging tool, but has been taken over in the last couple of years by financial players pricing in a multi-year outlook," said Olivier Jakob of Petromatrix.

"The fundamentals rule, but the question is whether the futures market should reflect the fundamentals of the next few months or the next few years."

Front-month U.S. futures hit a record on Wednesday of more than $130 a barrel, while contracts for delivery in 2016 exceeded $140.

The latest short-term factor in focus for oil is the tight supply of diesel.

But that is a symptom of long-term underinvestment in refining capacity and traders, who once concentrated on short-term inventories, are ever more focused on the future supply-demand balance.

Although high prices have eroded consumption, supply growth is not expected to keep pace and oil even at current levels might not guarantee investment in additional production.