We probably have seen the peak, but we think that this market is still extremely vulnerable, especially in the very short term as we're entering winter in the northern hemisphere, said Frederic Lasserre, Head of Commodities Research at SG Corporate and Investment Banking.

Even if we have a normal winter in term of weather, this will still be a huge break for any price drop and if we see colder temperatures, we'll see more spike in the oil prices and we'll probably retest the highs we tested a month ago, he added.

Most economists agree that this year's spike in oil prices reflect new underlying fundamentals with a market which has now no more leeway in terms of supplies. I believe the market is now pricing something new: the long term expectations (on the supply and demand balance), Lasserre said.

While world demand is expected to growth by 2.4 percent in 2005 to 84.4 million barrels per day and another 2 percent in 2006 to 86.1 million barrels per day, oil production is expected at 85.4 million barrels per day in 2005 and 86 million in 2006.

We basically only have 1 million barrels per day of leeway, Lasserre noted.

On Thursday, OPEC president Purnomo Yusgiantoro was quoted saying he was confident that global oil prices will fall in the second quarter of 2005 due to a decline in world demand.

Oil prices have fallen by about 16 percent in New York from all-time highs seen last month but remain up 44 percent so far this year.

Yet, many economists believe the higher average oil prices trend is here to stay.

We must get used to much higher oil prices in the future than we've seen in the past, as well as greater volatility in prices, Lasserre said, adding we're trying to tell our clients that they are not living in an irrational market.

The impressive rally reflects the fact that we're working at almost 98 percent capacity at the crude production level, 98 percent in term of transporting capacity as well as near total capacity for refining.

For 20 years, the oil market has lived with overcapacity, but the market is now preparing itself to work with under-capacity for 3-5 years.

Many oil companies have been reluctant to spend much of their profits on exploration and development, because past experience has shown that rapid price increases are usually followed by sharp downturns.

The main constraint for investment has been shareholders which are proving difficult to convince. Oil refining proved a disaster in term of investment, being non-profitable for 20 years, before finally starting to show some small margins in the last couple of years.

So oil companies are currently concentrating on share buying back and cutting down their debt.

Shareholders are not prepared to accept that these companies need to reenter a large investment program. They now need to invest in areas where the risk reward is going to be quite different from the past where they invested in Norway or Texas, Lasserre said.

During the 1980s and 1990s, transportation capacities like tankers were destroyed and pipelines were closed down because they were not profitable.

OPEC has no more spare capacity, apart from Saudi Arabia, and is unlikely to restore this spare capacity. We will be lucky if OPEC invest enough to match demand in the future, Lasserre said.

Within 30 years time, OPEC needs to double its production capacity to face demand, but this will required tremendous investments as well as the opening of their upstream capacity to international companies, a hot political potato.

The International Energy Agency has estimated that there will be a need for $3 trillion of investment over the next 30 years to satisfy demand in term of quality and also quality.

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