Greenspan Says Oil to Keep Rising on Capacity Limits

May 14 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said oil prices will keep rising as energy companies have invested too little in production and infrastructure to cope with higher demand.

Companies haven't been reinvesting enough to keep supply growing in line with demand, Greenspan said via satellite to a conference sponsored by Deutsche Bank AG in Singapore, according to an investment strategist who attended the event and who spoke on the condition of anonymity.

Increasing futures-market activity is expanding the aggregate demand for oil because more needs to be held in storage to meet contracts, Greenspan said, according to the person who attended the event.

``There's evidence that fundamentals are pointing to higher prices,'' said Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd. in Hong Kong. ``Even as demand and supply are in balance, the risks to supply and oil's attraction as an inflation hedge are pulling it higher.''

Crude oil rose to a record $126.98 a barrel in New York yesterday on concern U.S. refiners may fail to meet demand for fuels such as diesel and heating oil. Supplies of distillates in developed countries fell 6.7 percent to 477.6 million barrels in March from a year earlier, according to International Energy Agency estimates.

Inflationary Pressures

Crude oil for June delivery was at $125.99 a barrel at 11:53 a.m. Singapore time in after-hours electronic trading on the New York Mercantile Exchange.

Higher prices of energy and raw materials are fanning inflation around the world, even as economic growth slows. Fed officials yesterday said they're concerned about rising prices, reinforcing traders' expectations that the central bank's next move will be to raise borrowing costs rather than lower them.

San Francisco Fed President Janet Yellen said the central bank can't be ``complacent about inflation,'' and Cleveland Fed President Sandra Pianalto said prices are rising ``somewhat faster than I would prefer.''

``If Greenspan is correct that prices will rise, then inflationary pressures would set in,'' said CFC Seymour's Kowalczyk. ``That would prompt the Fed to act to tighten lending.''

Greenspan reiterated comments made last week that the worst of the credit crisis will pass once investors fully anticipate the likely losses on securities tied to subprime and other mortgages, where defaults have surged.

Subprime Losses

He said investors are still guessing at the extent of subprime losses, which can't be ascertained until house prices stop declining, according to the person.

This week's U.S. retail sales figures mean the U.S. economy is showing flexibility and resilience, though the depressing effects of the subprime crisis will filter through into other data, he said. Retail sales excluding cars rose 0.5 percent in April, more than twice economists' forecast.

Greenspan said efforts by China to suppress the value of the yuan aren't in the country's long-term interests, adding that the government needs to open its capital account, according to the person who attended the Singapore event.

The yuan has climbed 0.2 percent against the dollar since the start of April after appreciating 4.2 percent in the first quarter.

Greenspan, 82, served as Fed chairman from August 1987 to January 2006. Since then, he has given regular speeches, written a bestselling book and begun advising clients including Deutsche Bank. The paperback version of ``The Age of Turbulence,'' including a new chapter on the credit crisis, is scheduled for publication in August.