Concerns that oil production was spiralling up have been eased by Russia's decision to bow to Opec p...
Concerns that oil production was spiralling up have been eased by Russia's decision to bow to Opec pressure to cut its output.
With oil prices having demonstrated a lot of volatility in the past three months, concern had been mounting that non-Opec companies would not cut production, says John Hatherly, head of global analysis at M&G.
Fiona Stokes, investment manager Europe at Britannic Asset Management, shares his views. 'Over the past couple of weeks, there has been speculation that Russia would not comply as it has to cut back on exports,' she says.
'Opec has since cut its productions to keep a balance. It has recently been announced that Russia has produced more crude oil than Saudi Arabia, which is a major thing as Opec is losing market share. It is dedicated to maintaining the supply at £22-£28 per barrel, but it will get harder going forward.'
This year the oil price fell to less than $20 but has since risen to $25 at 20 March. Hatherly says: 'There are three reasons for the recent oil price rise. Both Opec and non-Opec producers have agreed to cut production.
'There is an encouraging demand for oil since the US economy has picked up, and Iraq was not in the equation when the oil price fell to less than $20. Bush signalling an attack on Iraq has certainly affected the price of oil.'
Stokes says: 'The tensions in the Middle East are effectively putting a premium of $2-$3 on the oil price.'
The trouble in the region has made if difficult to predict what will happen in terms of oil. Hatherly says: 'If there is an attack on Iraq, the price will spike up to $30. But there is resistance, so if Bush backs off from the attack we will see the price drift down.'
Providing Opec remains disciplined it should maintain its target price per barrel, says Hatherly.
He adds: 'If the price does go up, this will have a negative impact on recovery and inflation. The Federal Reserve has stopped easing monetary policy so it would push interest rates up. In January, there was an oil cut that was bad for Opec but good for the global economy. Cheaper oil simulates growth and is good for inflation.'
Stokes notes: 'Opec has been disciplined and there has been a pick up in demand as GDP growth strengthens. The US recovery and coupled with a constraint on supply, has meant a squeeze in oil prices,' she adds.
Refining and marketing production has been poor and it is the oil price rather than equities that have driven the sector, says Stokes.
She cites Repsol, the Argentinean producer, as a stock that has been negatively affected by a currency devaluation.
She favours Total Fina because it has strong production and has cut costs and ENI, which has long term restructuring and growing returns. She adds: 'The thing is that everyone likes these so we not expecting a lot of upside, but we do prefer it to the likes of Repsol. We are neutral oil as we do not have control over the tension in the Middle East so cannot form any sort of predictions.'
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