Global oil prices have grown to $26 a barrel on the back of a recovery in industrial demand, the cri...
Global oil prices have grown to $26 a barrel on the back of a recovery in industrial demand, the crisis in the Middle East and the success of Opec in restraining supply.
The latest European and US industrial output data shows the first modest increase in output since mid-2000, says head of global strategy at Standard Life Investments Andrew Milligan.
Worries over possible military action against Iraq and the impact this will have on pumping have also helped inflate prices, along with reduced Opec production of just 23 million barrels per day in February, down from 27 million barrels in December 2000.
Milligan says: 'The impact of these events is starting to appear in financial markets. In the equity markets in the year to date, some of the best performing sectors have been materials and energy. Oil prices may be higher but the cost of production will remain the same.'
Going forward, Milligan sees two possible scenarios, one favourable, the other less so.
Opec, he says, has had a degree of success in containing oil prices in a narrow range. The recent Opec meeting showed continued support for this policy. Even if prices remain as they are or go up a little, such costs should be easily absorbed by companies and households at a time when the global economic picture is improving.
The second scenario involves a sharp surge in oil prices to a level back above $30. This kind of event would reflect several factors, such as a surge in demand with which Opec could not cope or even a possible total cessation of pumping by Iraq. A surge in oil prices would probably encourage sector rotation in the equity markets as investors seek safe havens, away from the volatility in the oil sector.
Milligan adds: 'However, it is important not to paint too gloomy a picture. The International Energy Agency has recently trimmed its forecasts for oil demand this year. Opec is also producing at about 70% of capacity at present and is making reassuring statements about its ability to increase oil supply if there is a disruption in the market.'
Steve Tyson, head of the global equities team at Axa Investment Managers, still sees opportunities in the oil sector but believes value will be found at a stock level rather than by taking sector bets.
He thinks the current high oil price includes about $6 built in for Middle East tension and that a price of around $20 could be justified at this point if the tension was removed from the equation.
Should a peaceful resolution to the Palestinian/ Israeli conflict be found, he sees crude prices slipping back to the $20 a barrel level.
He says: 'We are holding a neutral position on the sector overall. Within our holdings, we are playing two themes. The first is volume growth. A number of companies including Chevron Texaco, Petrobras and BG have been stating they're able to grow production levels by some 7%-10% a year, which is very high for an oil company.
'The other theme is synergy. The sector has seen some high profile mergers in recent years, which have offered, and will continue to offer, overhead savings. Chevron Texaco and Total are the main companies benefiting from this.'
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