Output of oil and gas from the UK continental shelf increased slightly in January compared with December, but was down year-on-year, from 2,798,983 to 2,502,320 barrels of oil equivalent per day, according to the latest Royal Bank of Scotland oil and gas index.
RBS says in the report that while investment in the industry in 2007 continued to be strong, rapid cost increases driven by tight supplies of material, equipment and qualified labour eroded the real value of new capital.
It added that the inverse relationship between the dollar and the price of crude oil remained intact.
In late April, crude oil marked a new high of almost $120 per barrel just as the dollar fell to a record low against the euro and long-time lows against other major currencies. Then, as the US Federal Reserve hinted it may pause the easing of interest rates, the dollar jumped to a five-week high and crude oil prices fell by almost $5 a barrel in two days.
RBS said: “This provides more evidence that the recent rally in crude prices has largely been driven by dollar weakness. Energy futures look attractive given recent returns and are used increasingly as an inflation hedge, however, with a stabilising dollar the bet on rising energy prices has become riskier.
“Demand and supply fundamentals suggest prices should be 30% below current levels and we expect a correction in due course.”