A continued recovery in the world economy will boost demand for oil but its price is unlikely to break out of its recent relatively narrow range as there is spare capacity in the supply side of the system, argues HSBC Private Bank.

“We expect demand to recover slowly (the International Energy Agency expects record levels of demand beginning in 2011) with the emerging markets as a main driver, but we expect supply to keep up with demand for now,” said Willem Sels, UK head of investment strategy at the private bank.

“Further down the line, we do believe that increasing demand will provide support to prices. For the time being, our view is that the hesitant investor sentiment implies little trend, high volatility and range-trading for oil prices,” said Sels in a note.

Sels argues that oil – unlike gold – has not benefited from investor demand for “safe-haven”, low-risk assets; oil has struggled to push above $85 per barrel. That is still someway short of the $132.8 per barrel figure reached by spot crude oil prices about two years ago; in 1999, however, oil was around $18 pb.

High stocks, especially in the US, are an even greater limit on oil’s upside potential in the near term, said Sels.

“While we expect demand to gradually grow again, we believe that the supply side has room to grow as well, as production could easily increase. OPEC, the world’s largest oil production group, is now producing well below 2008 levels and could increase production in line with demand if necessary,” he continued.

He argued that oil below $70 per barrel “does not warrant the cost of extraction and production, while too-high prices depress demand”.

What is viewed as "too-high" a price has also come down in light of the financial crisis, said HSBC. Considering economies’ reliance on energy, the price of oil can act as a drag on the global economy if prices reach too-high levels. The consumer and the global economy would have trouble with much higher prices at least until the global recovery becomes more sustainable, said the bank.