While high oil prices in the US could restrain consumer spending and economic growth, the majority o...
While high oil prices in the US could restrain consumer spending and economic growth, the majority of fund managers do not believe the price will go much higher.
In the first 10 days of April, oil prices on the New York Mercantile exchange averaged $26.68 a barrel, up 9.2% from the average $24.44 a barrel in March.
Furthermore the cost of imported petroleum climbed 15.7% in March, the biggest increase since a 20.5% surge in April 1999.
Mark Barnett, fund manager at Invesco Perpetual, says: 'It is not great news if oil prices stay high in the US. There has been a high inflation knock-on effect on a number of industries that use oil such as chemicals and airlines as it increases costs.' For example, transportation company Roadway has expressed concerns that rising fuel prices may halt the rebound in the economy. The company has announced it may reduce this year's capital-spending plan of around $100m by as much as $25m if business does not return.
Higher oil prices have meant the US consumer is paying more for petrol. This means the US consumer has less money to spend on other goods, and while this does not pose a recessionary threat, it will slow the recovery down.
However, Barnett believes there could be a hidden benefit to the high oil price, in that it might encourage the Fed to keep interest rates low.
Mary Davis, international economist at Credit Suisse First Boston, agrees. She says: 'We think the Fed would put more weight on higher oil prices being a risk to growth than a threat to price stability.'
Barnett believes the oil prices are now as high as they are going to go and that political risks from the Middle East are already priced in, unless there is a war in Iraq. 'There is no fundamental reason why oil prices should go higher, although political decisions will determine whether or not it will go down,' he says. If the political situation stabilises he expects oil prices to return to $22 or $23 a barrel.
According to Davis, the recent jump in oil and commodity prices reflects geopolitical concerns and a turnaround in global industrial activity. He says this development should not raise inflation concerns, although it does partly reverse the strong disinflation dynamic that dominated the second half of last year.
Despite concerns over the price of oil, there are other key issues for Wall Street, according to John Hatherly, head of global analysis at M&G. 'The key issue now for investors on Wall Street is when or whether stronger economic growth will be translated into a renewed advance in corporate profits,' he says. 'Every quarterly corporate reporting season, beginning with the one that started in April, will be closely scrutinised for signs of improving profitability or a more upbeat tone in trading statements.'
This is something investors in other markets should be watching closely, he says. 'North American investors hold growing stakes in other markets, while leading UK and Europe-based companies with multinational ambitions typically place a high priority on making US acquisitions. So the course of the US economy will have a significant bearing on the fortunes of UK and other European-based multinationals, such as BP, NestlÃ© and Nokia,' he adds.
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