Oil analysts have hoisted 2004 crude price forecasts by 10 percent since January, reinforcing a growing consensus that higher energy prices are not going away any time soon, a Reuters poll showed on Tuesday.
A survey by Reuters of 18 analysts pegged the 2004 average price of benchmark Brent crude oil at $27.13 per barrel, up from a January forecast of $24.70 as low US inventories, runaway Chinese demand and Middle East political instability fuel heavy buying from speculative hedge funds.
Brent averaged $28.48 in 2003 - within a few cents of the highest level in two decades - and is valued at $30.83 so far this year as a five-year price boom triggered by Opec supply management shows no sign of running out of steam.
"What appeared initially to be the temporary result of Opec's hyper-restrictive supply policy now seems to be a permanent condition," said Frederic Lasserre of Societe Generale in a research note. "The oil industry has learned to function with just-in-time stocks at the price of extremely high freight rates and increased volatility."
Oil's sustained strength since last year's Iraq war has caught out many analysts, several of whom last summer said they expected Brent to drop back to around $22 this year.
Repeated sabotage delayed Iraq's post-war oil production recovery and hindered a rebuild in world oil stockpiles. At the same time Chinese and US economic growth has underpinned rising fuel demand.
"Raising price forecasts has become the standard characteristic of the oil sector over the past year as political factors, supply disruptions, a strengthening economy and with hindsight, remarkable Opec cohesion have combined to sustain oil prices," Citigroup researchers said in a report.
A growing number of energy experts are also coming round to the idea that as big new oilfields become harder to find and more expensive to maintain, higher oil prices are inevitable.
"Combined with declining resources for traditional non-Opec producers, rising costs and more recently a period of sustained dollar weakness, the temptation to extrapolate current oil price strength into an altogether more optimistic view of longer-term oil prices is overwhelming," the Citigroup report added.
Opec has again done its bit to sustain the price boom, springing two surprise supply cuts on the market over the past six months as the cartel signalled its determination to stop excess supplies building.
"There is a huge wave of bullish sentiment," said John Waterlow of consultancy Wood Mackenzie. "There are a lot of factors at the moment suggesting the fall we all thought was going to happen will not materialise."
Brent has now gained more than $7 a barrel, or 30 percent, since Opec announced a first round of quota cuts in September, even though the cartel cut little actual supply.
The oil market's apparent shift to a higher price environment has made it a tempting target for hedge funds over the past six months as they switched cash away from a sliding dollar.
"Fund investments in oil, particularly those made by 'global macro" funds, result from a macro-economic scenario which is relatively insensitive to short-term market fluctuations. Their investments in oil are part of a much larger strategy to invest in commodities in general," said SG's Lasserre.
A lot still depends on Opec resolve, with traders warning that the group's improved reputation for supply discipline will quickly fade if it allows the gap between official supply quotas and actual production to grow too wide.
Some crude traders say they are sceptical about how strictly the planned cuts will be implemented, while Opec ministers have said they are currently allowing leakage over existing quotas in the light of high prices.
"It depends on what Opec does and how strict they will be, how far they implement their cut," said Drollas.
"Opec always finds it harder to turn the taps off than on," said Matthew Parry of the Economist Intelligence Unit.
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