Oil prices will not experience a sustained recovery until 2011 at the earliest, according to a new report by TD Economics.

On Monday, crude for May delivery rose US$1.73, or 3.3%, to close at US$53.80 a barrel on the New York Mercantile Exchange. This adds to a sharp 10.4% boost in crude futures last week, but this price rally will not last long, the report says.

“That rally is likely to prove temporary,” the report says.

Furthermore, widespread expectations for a recovery in 2010 will be disappointed, since the world will remain “awash in oil,” particularly as demand remains weak.

“While the recent spiral in prices down from about US$150 per barrel has provided support to consumption, this impact has been dominated by shriveling global activity and incomes,” the report says. “Our bet is that ongoing global deleveraging will continue to weigh on economic performances into 2010.”

The report also notes that although global supply is being reduced this year, it is not contracting fast enough to restore balance in the marketplace. In addition, OPEC has signaled it will not make more substantial cuts to supply in the near future.

As a result, TD economists expect oil prices to exhibit a relatively flat trend throughout this year and next. They predict prices will hit an average of US$40 a barrel by the third quarter, and will climb to US$55 a barrel by the end of 2010.

The report adds that investor interest in oil will likely be dampened and overshadowed by rebounding equities next year.

“Badly-beaten equities are likely to move to centre stage next year once signs of a bottom in the global economy take root,” the report says.

Another factor delaying a recovery in oil prices is the fact that strong inflation is not likely to set in for some time. Crude benefited from its role as a hedge against inflation prior to the global meltdown, but this phenomenon will not likely return until a firm economic recovery has taken place in 2011, according to the report.

The economists predict that oil prices will climb to US$75 a barrel in 2011.

IE