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Money Marketing Markets: ‘Oil bears next for US endangered species list?’

Oil prices surged to yet another record high this week with Brent Crude touching $135.14 a barrel on Thursday.

The oil price has now risen by over 20 per cent in a month, doubled over a year and increased tenfold over the last decade.

The latest spike followed the US Department of Energy reporting on Wednesday that its fuel stocks had fallen by 5.4m barrels, dashing expectations of an inventory rise.

This followed on from investment banks SocGen and Credit Suisse both raising their oil price expectations for 2008 this week. SocGen revised its estimate up $14 to $115 and Credit Suisse by $29 to $120.

Two weeks ago, Goldman Sachs said we could be looking at $150-$200 a barrel by 2010. If it had come out with that a few months ago we would have been calling for the men in white coats, but oil bears are now a seriously endangered species.

Investec fund manager Mark Lacey says there is growing consensus that oil prices are set to remain at or close to record levels, at least in the short-term, with extraction costs likely to remain north of $100 a barrel “in 2008 and beyond.”
The question is how this will affect the wider market.

Jeremy Tigue, manager of the Foreign & Colonial Investment Trust, believes that the impact of high prices on the economy has so far been limited but will increase as they are increasingly passed on to consumers.

“Almost everyone has been wrong-footed by this rise but so far there has been surprisingly little impact on economic activity or general inflation. However, with no signs of prices going down, the situation is likely to change,” he says. “High prices are likely to soon start reducing demand as drivers move to smaller cars and people turn down the central heating and put a pullover on instead.”

The impact on the airlines is already starting to tell. Across the pond, eight US airlines have already filed for chapter 11 bankruptcy protection this year and American Airlines said this week it is to cut its operations by 12 per cent and mothball several of its older, less fuel efficient jets.

British Airways has been feeling the pinch, down 8 per cent this week by midday trading on Friday, despite the fillip of pilot’s union Calpa dropping strike threats on Thursday.

Lacey says the major airlines have now retired 4 per cent of their global capacity but ongoing demand from developing countries – many of which subsidise petrol prices – is more than taking up any slack.

Oil-related stocks have had a slightly more bumpy time than might have been expected with strong gains followed by pull-backs from profit-takers throughout the week.

Miners’ have been similarly volatile and the sector’s bright start to the week was wiped out by nervy profit-taking after Morgan Stanley said that commodities could see a 10-20 per cent correction in the short-term.

The investment bank also issued a two-pronged warning that the banks’ face further writedowns and consumer spending will continue to atrophy.

Richard Berner, chief economist, says: “Banks and broker dealers in the US and Europe are perhaps two-thirds of the way through the writedowns they will need to take. Moreover, supply-induced increases in energy and food prices are lifting headline inflation and eroding discretionary income.”

Indeed, he estimates higher food and energy prices will have sucked $135bn out of people’s pockets between December 2007-September 2008 in the US alone.

Further evidence of the voracity of the credit crunch’s bite this week came with UBS announcing a $15.6bn rights issue, a billion more than expected.
Concerns remain over Royal Bank of Scotland’s record-breaking £12bn cash call with fears that the stock will struggle to find buyers pushing the stock to a new low of 241.5p midweek.

Elsewhere, the Council of Mortgage Lenders said new mortgage lending could fall by a fifth this year and Nationwide admitted lending has halved since last year.

The knock-on effect is putting further strain on housebuilders, which had another tough week after the Home Builders Federation said widespread job cuts are on the cards. This, along with more negative trading updates from the sector – notably Bellway and Great Portland, saw sector top dog Persimmon lose another 10 per cent.

All this saw the FTSE 100 shed another 3 per cent in a week of record highs and record lows – none of which provided too much cheer for the majority of investors.



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