The price of oil is overvalued by at least 40% and should fall to around $80 to $90 per barrel over the longer term, a top European Union economic adviser was quoted as saying on Wednesday.
Klaus Gretschmann, director general for internal market issues at the EU's Council of Ministers, told German daily Die Welt that a speculative bubble had formed around oil prices which would burst, lowering the cost of crude.
The price of oil is at least 40% overvalued. 20% of the current price is attributable to foreign exchange effects and the weakness of the dollar, another 25% are down to speculation.
Average production costs for a barrel of crude were currently around $15 to $25, and a clear market correction and that the bubble could burst.
The longer-term price trend is between $80 and $90 per barrel of crude. There were indications that "exaggerations" in oil prices had reached a peak, but it was hard to say exactly when this bubble would burst.
Oil prices surged to a record of more than $139 per barrel in the United States last week, and have flirted with that level since. Financial markets had played a "very considerable" role in the recent development of oil prices.
Since the experience of the US mortgage crisis, financial investments are being shifted from shares and bonds to commodities. "Exaggerations are the result." Institutional investors in particular had spent heavily on commodities and purchased futures contracts in expectation of rising prices.
In the United States alone, the sums involved in this have risen from $26 billion in 2005 to $260 billion at the start of April 2008.
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