Oil prices are weakening globally following the events of 11 September, as some 6% of total oil cons...
Oil prices are weakening globally following the events of 11 September, as some 6% of total oil consumption relates to aircraft travel, according to Ian Henderson, fund manager at JP Morgan Fleming Asset Management.
Henderson says the reason oil prices have become weak post the terrorist attacks is the perception that people will now travel less. As a result, Opec oil prices have fallen to $21, which is below the recent $22-$28 trading range. When prices fall below this range, Opec generally takes action within 10 days to adjust production and bring the prices back into line. As at 22 October, it had been 16 days since the prices fell below the trading range.
Steve Thornbar, pan-European oil analyst at Threadneedle, says Opec seems to be losing its commitment to defending its price range as speculators sell and push the prices below the range.
He says: 'Approaching third quarter earnings growth figures, momentum will be negative for the first time in 10 quarters. When you put this alongside the fact that the sector is on an all-time relative high, it all points to the fact that it may be time to take some profits and reduce exposure from the area.'
Robert Waugh, head of UK equities at Edinburgh Fund Managers (EFM), says the structure of oil is currently very weak, with the demand from the US likely to slow down.
He says: 'A lot of the problems are geopolitical, such as whether or not the Saudi Arabians will accept a lower oil price to help out the US in its current situation.'
Thornbar says there has been some talk about Opec doing something to adjust production levels, but nothing official has been said and nothing has happened that the market has latched onto.
Waugh adds that EFM has been reducing its oil weightings post the US terrorist attacks and has not done a lot with them since.
He says the group was overweight in oil before the WTC attacks and is now neutral. He adds it is more likely to reduce its exposure than build it up from here on.
'Oil consumption grows at 3% per year so it is not a fast-growing sector,' he says.
'It is not that the stocks are cheap, it is just they are defensive against a market where the downgrades are much greater.'
Henderson says the US inventories of oil products, like refined and crude oil, have been rising and are adequate for the country's current needs.
In an environment where forecasts have been pared back dramatically, oil, although regarded as a defensive sector, is still affected at the margins, with people acting to push oil prices down not up. While the mood has turned sombre for oil, the group does not see the sector being that vulnerable by virtue that it was not run up to ridiculous prices in the first place.
Henderson says Opec is currently producing 1.4 million more than its official quota of barrels per day global oil consumption. The global barrel consumption is run at 76 million per day, of which Opec's quota is 23.2 million. It is currently producing 24.7 million, however, which is 6.46% higher.
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