UBS's Hatheway Sees Support For Oil Price At Current Levels

(Bloomberg News) Oil, which reached a 29-month high yesterday on concern the turmoil that has cut Libya's output will spread to other parts of the Middle East, is unlikely to surrender its recent gains, according to Larry Hatheway, chief economist for UBS Investment Bank.

"I tend to think oil prices will be supported at around current levels by demand," Hatheway said in an interview in Cape Town, South Africa today. "Spikes can't be ruled out if the unrest spreads or even just continues."

Crude gained as much as 5.4 percent to $103.41 a barrel yesterday, and traded at $97.48 at 2:47 p.m. Johannesburg time. The price fluctuated after the U.S., Saudi Arabia and the International Energy Agency made assurances they can compensate for any disruption to Libyan supplies.

"The spreading political risk and popular discontent caught a lot of observers by surprise," Hatheway said. "It's very, very difficult to know whether it would extend beyond the North African and Middle East countries that thus far have been affected."

Several countries, including India and South Africa, have raised concern over recent days that the surge in oil prices may stoke inflation.

High fuel prices typically have a greater inflationary impact in emerging economies where consumers spend a proportion of their income on necessities such as energy and food, Hatheway said. Central banks may have to raise interest rates in response, he said.

"We do think that the Chinese authorities have some work left to be done," he said. "Their concerns are not just about inflation, but an overshoot of credit, and in some areas perhaps overheating in the domestic economy."

Hatheway expects investors to continue decreasing their holdings in emerging markets until the political turmoil in the Middle East subsides.

"Equity markets have taken a bit of a setback," he said. The higher oil prices have begun to raise "concerns about growth. Investors are beginning to think not just about inflation consequences, but about the growth consequences of higher commodity prices overall."