Weak demand means oil price could fall

The recent oil price rise has not been driven by a recovery in demand, said Royal Dutch Shell's chief financial officer after the group reported a sharp drop in profit and warned the outlook for 2010 remains opaque.

'It’s difficult to say what the cause of the rise is but it is not fundamental. Demand has not picked up,' said Simon Hendry.

The price of oil has risen from lows of $34 in February to above $78.

Shell said while the oil price has been increasing, the prices Shell got from customers were broadly the same as in the second quarter 'due to contractual time lag effects.'

Hendry said business sales such as transportation are a key part of Shell's business and these are showing little sign of recovering demand.

He said signs of recovery in the US are also limited and while the economic environment in Asia is improving that hasn't yet translated into a pick up in demand for the oil and gas.

He said the massive global stockpiles also justify Shell's cautious approach to the future direction of the price of oil.

Earlier chief executive Peter Voser said he is 'not expecting a quick recovery' in prices despite some indications that energy demand and pricing are improving.

Shell's fortunes are more acutely linked to the price of oil than for many of its peers and low prices mean the group has to add to its debts to pay its dividend as low oil prices knock cash flow.

A $1 dollar move in the US oil price can build or knock Shell's profits by $90 million dollars per quarter, Hendry said.

A report from business analysts Ernst & Young also pointed to an uncertain outlook for oil.

'To a large extent, oil prices continue to be higher than market fundamentals justify,' said Marcela Donadio, Americas oil and gas sector leader at the firm.

‘General optimism and a weakening US dollar are creating strong commodity prices, despite sluggish short-term demand and high inventories,' she agreed.

'The key question in the months ahead is, once government-delivered stimulus efforts run dry, will private and corporate dollars step in to carry on the economic recovery and create growth in energy demand?' said Donadio.