The demand for oil-based products will be poor in 2003 owing to low economic growth impacting on oil...
The demand for oil-based products will be poor in 2003 owing to low economic growth impacting on oil sector prices.
That is the conclusion of Sarasin's Simon Wilson, theme leader for global energy. He says: 'Our long-term economic projection is for a protracted period of anaemic growth, which means demand for petroleum products is likely to be weak.
'Following prolonged periods of oil price strength, which we have experienced for the past three years, the correlation between the demand for oil and GDP growth has tended to be lower. The combination of these two factors, we believe, leads to a poor long-term demand environment.'
Other factors will impact on demand for oil and pricing power once the uncertainty over the Iraq situations has been resolved, Wilson says.
'Iraq has the second largest reserve base in the world after Saudi Arabia and it is clear the country will not remain in its current form following US military action, which now seems inevitable,' he adds.
'Iraq's infrastructure and productive capacity has been starved of capital for the past decade and the implication of this is that production cannot be instantly increased.'
It will, however, come on line at some point, he argues, leading to a weakened long-term investment opportunity in the oil sector.
'To convert reserves into production typically takes at least three years and more often nearer five,' says Wilson. 'However, the perception of the equity market will be that production comes on sooner rather than later. In the event a new administration is installed, the major integrated oil companies will be invited to deploy the dollars in Iraq, which will eventually have the desired effect of increasing production.'
This is ultimately likely to place pressure on other Opec members to curtail production in a depressed demand environment, Wilson says. Russia and other former Soviet states are a well-known and increasing threat to Opec, having upped their production by a compounded rate of 4% over the past five years, he notes.
'We will still have an active interest in some of the companies but will be more wary than most over the threats to the fundamentals.' The market has formed a consensus that oil prices will drop during 2003, according to Geoffrey Dennis, an analyst for SchroderSalomonSmithBarney in New York.
Dennis feels there is a significant risk oil prices will fall back towards their historical averages over the course of 2003. Like Wilson, he believes a key driver of oil prices in 2003 will be the resolution of the Iraqi crisis. 'The end of the Iraqi conflict and the accompanying decline in oil prices is likely to be met by renewed outperformance by oil-importing countries such as Asia and lead to profit-taking in oil-exporting countries such as Russia. It is not impossible oil prices will plunge back to equilibrium levels, even while Iraq remains on the geopolitical agenda.' Despite this, Dennis sees a number of stock-specific opportunities in Russia, where companies remain undervalued compare to their international peers
Stockpicking opportunities in Russia.
Some time before Iraqi fields back on line.
Lower oil prices to benefit Asia region.
Oil prices have moved down.
Risk for oil prices on the downside.
Iraqi resolution would increase supply.
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