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Market weighs up the cost as oil prices jump

As the wave of Middle Eastern protests arrived in Libya, the country’s long-standing ruler Colonel Muammar Gaddafi cracked down on the population last week with a brutal show of force.

This prompted energy companies to halt production in Libya, the world’s 12th-biggest exporter of oil. These included Repsol, Spain’s biggest oil and gas company, and ENI, Italy’s state-controlled oil and gas group. Others, including Royal Dutch Shell and BP, evacuated expatriate employees.

As a result of the turmoil, Brent crude jumped to $119 a barrel on Thursday, a level last seen in August 2008. There are concerns the price could go much higher if the protests spread to Kuwait or Saudi Arabia.

There are upsides and downsides to rising oil prices for investors. Those who have a big weighting in natural resources funds are likely to benefit but companies that are heavy energy users will suffer.

Adviser Fund Index panellists are concerned about the impact that rising oil prices will have on inflation.

Graham Toone, head of investment research at AFH Independent Financial Services, believes everyone should be concerned about inflation. He says: “When oil prices rise, it is usually associ- ated with an economic boom but this time it is the opposite. This price jump will have a detrimental impact on inflation.

“The expendable income of an average family will shrink as fuel bills rise.”

Toone says fund managers involved with natural resources have been quieter about the oil price rises in association with the Middle East than he would have expected.

He says: “We have a small amount of direct exposure to oil with holdings in Shell and BP but we have not heard any comm- ents from fund managers who deal with that area. Everyone is obviously keeping a keen eye on events.”

However, oil price rises are benefiting some investors. James Calder, research director at City Asset Management, is monitoring specific natural resource funds that have been performing extremely well.

He says: “The one we hold is Investec global energy fund, which is basically a play on oil prices. For obvious reasons, it has been doing very well over the past few days.

“Before the trouble kicked off, we had been noticing strong performance, even during the time when oil analysts had been bearish on its future prospects.”

Calder notes there is a lot of conversation focusing on gold alongside the rising oil prices. He says: “Gold is a safe haven and I think it has got to the stage that it is almost seen as the currency of the world. Even when people are not happy holding US dollars, they will still hold gold.”

Most natural resource funds will contain a mix of energy stocks. Gold plays a partic-ular role as it is often seen as a hedge against global uncertainty.


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