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Money Marketing Markets: ‘Oil price surges to record high’

Oil hit a record high today, pushing through the $125 a barrel mark, increasing concerns about inflation and its likely impact on economic growth.

Black gold has dominated the headlines all week. On Monday, Goldman Sachs analyst Arjun Murti said oil could reach between $150-200 a barrel by 2010.

Murti has proved himself something of a sage in recent years, being the first analyst to predict the current spike back in 2005.

He said: “The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.”

Murti points to Opec’s lack of spare capacity and the inability of the major non-Opec producers, particularly Russia and Mexico, to increase their output as a major cause for concern.

On Tuesday, concerns about the disruption to supplies caused by rising levels of lawlessness in Nigeria saw crude surge through $122 a barrel.

Then on Thursday, Opec secretary general Abdalla El-Badri hinted the cartel will not up its output. He blamed dollar weakness for the high prices and claims there is plenty of oil in the market. There may be, but it sure is getting expensive and is not likely to get any cheaper soon if the speculators are right.

The number of bets on oil passing $200 a barrel by the end of the year has risen by 40 per cent in the last week alone.

Simon Carter, a fund manager at Aegon Asset Management, says this is being driven by speculation but there are a number of technical factors supporting continued higher prices.

He points out that May, “the shoulder season” traditionally heralds a dip in US oil demand as heating needs diminish and the driving season kicks off.

“The concern here is that demand has actually gone up rather than down. US refineries do not have the stock to crank up capacity and so prices will continue to go up until we see demand destruction,” Carter says.

However, with China responsible for a third of demand and people so wedded to their cars, this is not likely in the near future.

“As long as people keep their jobs they will keep on driving and the Chinese are not affected by the oil price rises because it is subsidised by the Government,” he adds.

Several sectors are starting to feel the pinch. British Airways fell 3.7 per cent on today’s spike.

Carter says: “The airlines can pass on some of that cost through higher fuel surcharges but they are not getting it all back.”

BA had already been hit earlier in the week after revealing April traffic volumes disappointed, partly due to the terminal five fiasco.
Exporters are also being squeezed.

Marc Cogliatti, strategist at HiFX, says: “Input price inflation reached an all-time high in March of 20.6 per cent year on year, driven largely by fresh rises in crude oil prices. Meanwhile it is becoming increasingly apparent that UK firms are no longer able to absorb such cost pressures, as output prices rose for a seventh consecutive month in March to 6.2 per cent year on year.”

He says inflation concerns prevented the MPC from cutting interest rates this week. This saw banks slide on Thursday but today’s record losses from AIG, the world’s largest insurer, coupled with its $15bn writedown spooked the sector even further.

By early afternoon trading on Friday, the FTSE 100 was trading at 6,184.9, down 1.37 per cent on the day.

The week had started out fairly flat with banks wiping out gains upon news that UBS is axing 5,500 jobs. Even Lloyds TSB’s solid results were not enough to lift the sector.

Wednesday saw modest gains with banks and oils bouncing back. Enterprise Inns was the day’s winner up over 20 per cent on news that it has been cleared to convert to Reit status.

Solid performance from the miners following speculation the Eurasian Natural Resources Corporation may bid for Kazakhmys buoyed the sector.

Thursday’s market closed at 6261, a four month high until Friday’s bank and oil-induced slump.


McCarthy confident on small societies

FSA chairman Callum McCarthy told the Treasury select committee this week that he is “very confident” that small societies will indirectly benefit from the Bank of England’s £50bn liquidity injection.

Guessing game

It is about this time of the year that superstitious investors start getting nervous. Should we sell into this rally, they will be saying to each other? And we have had a decent rally. As we flirted with 6,100 on the FTSE 100 Share index last week, the market had recovered by around 13 per cent in just six weeks. The recovery took the market to within 10 per cent of the peak attained in June last year.

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