The gradually rising oil price is likely to stay at its current levels for some time and will begin to affect the wider economy for both consumers and firms, investment managers and analysts are predicting.
The NYMEX crude spot price per barrel has slipped back slightly today to around $75.77 from $76.35, after UK authorities reported terrorist attacks to blow up airplanes had been foiled, the knock-on effect being less air travel in the short-term and lower demand for oil as a result.
But the price per barrel has been fluctuating around $78 for some time, the announcement by BP on Monday it will close one of its fields in Alaska, forced the price back to $78 and with continuing supply pressures elsewhere.
As a result, analysts say the price is likely to stay high in the short term and will now begin to affect the cost base of other sectors.
More specifically, firms such as Barings, First State and Investec believe while the increased price over recent months will reduce at some stage to around $70 a barrel, over the next 2-3 years the price is likely to stay at around $80.
Jonathan Blake, manager of the Barings global resources fund, suggests $80 is “feasible in the short-term” and pressures of the rising oil price are beginning to manifest themselves as domestic and global inflationary pressures.
“Oil and energy is a large component of inflation and is having an impact on monetary policy and the oil price should itself be seen as a tax. The oil price for the foreseeable future is going to be higher than we have seen in the last 15 years. Oil is likely to stay at around $60-70 a barrel, and if you compare the prospect of a higher price with $60 per barrel, for example, the inflation looks as high as that when you compare $78 with $45 a barrel the same time last year,” says Blake.
Like Blake, Adrian Jackson, energy analyst at Investec Asset Management, points to supply pressures, particularly in geo-political parameters, as the reason for the oil price staying high in the short-term.
“The situation with BP losing 4,000 barrels a day in production wouldn’t usually be an issue. But we already have around 700,000 barrels a day out of production because of the unrest and kidnapping risks in the Nigerian Delta. The market is nervous of any further capacity supply-side problems when the market is already right on the balance.
That capacity shortage is likely to continue until we get back to the situation in the 80s where Opec had the capacity to deliver four million barrels a day,” says Jackson.
Importantly, he suggests many investor analysts have so far to pick up the fact supply pressures could heighten as the globe heads into the winter season, and increase the prospect of oil value affecting other sectors of the economy.
“Opec countries are currently delivering 1-2 million barrels of super capacity. But we are in the seasonal low where oil usage is not as great as the winter season. As we go into winter, if these disruptions are still ongoing, and the Middle Eastern political unrest continues, there will be a shortage of oil capacity,” says Jackson.
“We are going to have to get used to higher energy prices. We have seen those industries which are energy-intensive are having to pass on the costs. They have absorbed it through winter costs. It does take a large time to feed the cost through to the wider economy, but it is beginning to happen.
Prices of goods will depend on the impact of these energy costs and I expect for the next 2-3 years to see the oil price in excess of $80 a barrel,” he adds.
Only yesterday, the Bank of England’s inflation report suggested a further interest rate rise may be needed by the end of the year to counter rising inflation unless energy prices reduce, yet analysts suggest this could be less likely in the short term.
In contrast to other managers, Ted Scott, director of retail at F&C, is not concerned the oil spot price will stay high enough to particularly damage the economy.
But he is predicting while several market sectors, such as the service industry, may not be particularly affected except through decisions made by the BoE to counter inflation, talk of the spot price reaching $100 a barrel is a little more likely under the current geo-political conditions.
"Geo-political tensions are quite high, and we have had a period of strong global economic growth, interest rates are going up. Slowing growth rates will be reflected in demand for oil which will have a negative impact on the price so if the price spikes to $100, it will be because of Iran getting involved in the Lebanon crisis," says Scott.
"Oil has a big inflationary input as the cost feeds through the economy and when oil prices have risen, there is a slight spike on inflation, albeit not the double digit inflation we got used to in the 70s and 80s. The cost of goods is coming down as a lot of goods are still coming from China. The service industry, on the other hand, is less reliant on oil and less likely to affect its costs but some companies will see their balance sheets affected,” adds Scott.
Todd Warren, senior analyst for global resources equities at First State Investments, suggests while the spot price may improve at some point, the lack of investment by the oil industry during earlier years is now beginning to take its toll too, and may add to the likelihood of it staying higher because accessing the resource is still difficult with a shortage of skilled labour and specialist service equipment.
At the same time, the cost of oil per barrel is now beginning to affect the cost base of the oil companies themselves, says Warren.
“We’re in the middle of reporting season for the oil and mining sectors, and there are very few companies who are able to avoid this all-pervading cost rise across the spectrum.
"It is a vicious circle as a higher oil price influences the oil companies to go look for further oil and gas reserves and there is then more demand for services such as drilling rigs. But they are having trouble putting enough skilled labourers onto the rigs and it is only worsening whether it is deep sea offshore or land rigs. Not only do we have the additional rigs under pressure on a daily basis, but safety also suffers because the labour source is not sufficiently skilled.
He continues: “We’re in a situation we’ve never been in before and there are more problems to come. Russia’s grand energy plan and what they forecast as demand 2001-2002 is now likely to kick in next year. They can meet their own oil and gas demand today, but if their own demand plays out as expected, they are not going to be able to meet the contracts they have with the rest of Europe and Eastern Europe. If this Russian Behemoth wakes up, we’re going to have real problems,” adds Warren.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].
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