London, 1 May 2010

Oil markets are driven by fundamentals of supply and demand, not speculation, and still the price risk is to the upside, BP's Chief Executive Tony Hayward told Reuters. Debate has raged over the extent to which nonfundamental players or speculators have boosted an oil market, which has risen above $85 a barrel for U.S. crude. But in an interview with Reuters, Hayward stuck to his long-held view fundamentals are crucial. "It's fundamentals that move the price. The financial market sees where the train is going and jumps on and off from time to time. If the market sees that the train's leaving the station, they catch it, but they don't start the train," Hayward said.

BP has said it sees the oil price at $60-$90 dollars in the medium-term, with the risk "more to the upside than the downside," Hayward said.

The price rally of 2008 when U.S. crude futures hit a peak of $147.27 a barrel in July was followed by a crash that pushed oil down to just above $30 a barrel in December that year after recession hit and high oil prices led consumers in the developed world to curb consumption.

The demand contraction demonstrated oil above $100, which translates into around $4 a gallon for gasoline in the United States, led consumers to change their behaviour.

"They stopped driving," said Hayward. "What we don't know is what's going to happen in non-OECD. What no-one really understands is the demand side elasticity in non-OECD. What we do know is they're buying cars like they're going out of fashion." There is also an upside risk on the supply side.

"You go out a year, we're going to be down to surplus capacity of three million barrels per day," Hayward said. That compares with more six million bpd now, according to figures from the Organization of the Petroleum Exporting Countries.

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